Since the greatest threat to any company — other than bad management — is competition, anytime you can find a company that is so entrenched in its sector that it would take a nuclear bomb to dislodge it, you should hold on for the ride. Thus, if you can invest in a monopoly or oligopoly, that’s an investment you want to make.
When it comes to getting letters or documents from one place to another, and a fax machine just won’t do, there really are only four choices. In fact, there might soon be three. One of those choice, the U.S. Postal Service, is floundering under billions of dollars in losses. As a business, it stinks. When Congress saddled it with having to pre-pay years worth of pensions, it made it an even worse business. Now the Post Office is going to lay off a lot of people and fall even further behind it’s competition.
That competition is FedEx (NYSE:FDX), UPS (NYSE:UPS) and DHL Express. My choice among these companies is UPS, although it’s a close call with FedEx. The trick between these two powerhouses comes down to wide variances in the customer experience from region to region, and even from locality to locality. They are both essentially commodities, so there is a perpetual (and probably rather algorithmically complex) battle going on behind the scenes when it comes to pricing. I always check all four services for price, but the Postal Service has to have an extremely compelling bargain to get me into one of their offices.
Given that UPS isn’t all that different a product from FedEx, I had to look at their respective financials to make a choice. At first, it looked like FedEx was the way to go, as their five-year annualized growth rate is 16% vs. UPS’s 11%.
However, UPS has done better during the economic recovery. Revenue increased 9% from $45.3 billion in 2009 to $49.5 billion in 2010 (FedEx’s decreased). For the second quarter of 2011, revenue increased 8% to $13.2 billion compared to $12.2 billion in the second quarter of 2010. Meanwhile, net income increased from $2.15 billion in 2009 to $3.49 billion in 2010 (FedEx was flat). For the second quarter of 2011, net income was up 26% — from $845 million in 2010 to $1.06 billion.
Free cash flow also shows glaring differences. FedEx had $300 million of it in 2009, and $567 million in 2010. Ah, but UPS had $5.8 billion and $3.7 billion, respectively. For the trailing 12 months, UPS’s free cash flow is $2.44 billion vs. FedEx’s $600 million.
And to top it off, UPS pays a very nice 3.2% dividend vs. FedEx’s 0.6% yield. That wipes out any difference that might be in growth over the next five years, and UPS is generating more cash by far. That means it has more cash to market, expand and attack its competitors.
What can brown do for you? Provide solid returns over the next several years.
Lawrence Meyers owns shares of UPS.
