Postal Service Default - What Does It Mean to Investors?

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The US Postal Service has seen better days. The service recently missed making a $5.6 billion payment that was due to the US Treasury on September 30th, marking the second such default to occur this year. With Congress out of session until after the November elections, legislation vital to the USPS has been postponed and funds are running low. Postmaster General Patrick Donahoe is hopeful that Congress will take action once they return to Washington, and until then is doing his best to reassure postal customers that their mail service won't be interrupted.

While things may seem dismal for the USPS, alternate shipping companies such as United Parcel Service (NYSE: UPS) and FedEx (NYSE: FDX) could benefit significantly from the situation. With the holiday season approaching, consumers who worry that the USPS budget woes might negatively affect service during the Christmas shipping season could seek out alternative shipping options to ensure that presents and other parcels reach their destinations on time. Slow-downs and service interruptions don't actually have to occur for this to happen; all that it takes is the idea that a slow-down or interruption could occur for some postal customers to start making other arrangements.

Of the two companies, UPS is likely a slightly better buy for investors simply because they have the bulk necessary to better handle a larger-than-usual influx of Christmas parcels; they have a larger overall shipping network and a larger fleet, two aspects that could be heavily promoted if competition for customers turned off by USPS problems became fierce between the two companies. That's not to say that FedEx would crumble under the weight of added parcels, of course. Both companies actively hire additional help around this time of year, so neither is in danger of collapsing under the strain of additional Christmastime customers. UPS simply has more assets already in place, giving them a slight advantage over the competition if this year's Christmas rush requires it.

The benefits to UPS and FedEx go beyond the potential for more customers this holiday season as well. Among the changes that Donahoe and others within the Postal Service are hoping get approved by Congress are the closing of some lower-volume sorting facilities and a possible reduction of delivery schedules to eliminate Saturday mail delivery. This could result in a general slowdown of mail delivery by adding another day of mail accumulation that must be sorted and slightly reducing the facilities available to sort it. The slowdown wouldn't be catastrophic and might only lead to a day or so being added to long-term mail transit, but if such a slowdown does occur then it could make UPS and FedEx appear as slightly faster shipping options. The elimination of Saturday delivery would also add value to the premium Saturday delivery options that the companies offer, tempting some customers to pay the premium price when they might have otherwise simply have sent their packages through the mail.

The potential increase in business would come at a good time, especially for FedEx who has been struggling with a decrease in its Chinese import business. Both companies are down from highs earlier in the year, though they are still trading significantly higher than they were a year ago. An influx of domestic business would help to secure business revenues against some of the economic upheavals currently underway in Europe and Asia, especially if it brought with it an increase in premium shipping services.

It's worth noting that both companies do have partnerships with the US Postal Service; both UPS Mail Innovations and FedEx SmartPost shipments use Postal Service carriers and sorting facilities for a portion of a package's delivery. These shipments would likely not be significantly delayed even if an overall postal slowdown does occur due to the fact that they aren't in the postal system for an extended period of time; they are typically sent to a regional postal facility close to the point of delivery, so the time spent in the UPS or FedEx network would help to compensate for any delays experienced by the Postal Service. This is another point where UPS could potentially gain traction over FedEx, as a larger network means that they could dedicate more resources to ensuring quicker Mail Innovations deliveries if necessary.

If all goes well, Congress will take action that could correct some of the problems that the Postal Service is having and help it to stabilize its operations; this may result in slightly longer delivery times in some cases and could reduce delivery to five days per week, but it would prevent a lot of more severe problems that the USPS will face if action isn't taken. These changes are likely to work out well for UPS and FedEx, adding more value to their services without either of them actually having to improve their current services (though improvements would certainly help them to compete against each other and other shipping options.)

Croaxleigh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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