Cash Cows

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There may not be a U.S. Postal Service initial public offering (IPO) overnight, it could happen at some point in the future. The federal government hasn't been able to right the U.S.-postal ship and Congress has been slow to pass legislation that would allow the entity to shutter Saturday mail service, which would save the USPS money.

Privatization of the post office is is not that far fetched. USPS  already works with private companies FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS), and in fact is on track to pay the former some $1.4 billion in 2012 for its help delivering packages, according to a recent segment with Patrick Donahoe, USPS Postmaster General, on The Wall Street Journal.

One particular spot that has been weighing on the USPS is in retirement benefits, as it recently defaulted on a $5.6 billion payment to the U.S. Treasury to fund future retirement benefits, bringing the total value of the post office's retirement-benefit default to more than $11 billion.

As a public company, the USPS might pay an attractive dividend, as the organization generates some $225 million in cash flow per day, according to Donahoe (speaking to the WSJ). While the option of a privatized post office gets tossed around, it has become glaringly clear in this tough global economy that the grass isn't always greener on the other side.

Don't Cry for UPS

In its most recent quarter UPS reported inline profit results of $1.06 per share, but revenues of $13 billion fell short of estimates.

Despite weakened international trade activity, which was expressed on the company's earnings conference call, UPS is sitting on a lot of cash. In the first nine months of 2012, the transportation company's free cash flow surpassed $3.6 billion, according to the most recent 8-K filing. With its cash, UPS spent $1.4 billion in a share buyback and also paid investors $1.6 billion in dividends, which exceeded last year's payout by almost 10 percent.

Similar to the USPS, United Parcel Service is facing some pension headwinds of its own. In a revamping of retirement liabilities for select employees, UPS took an after-tax, non-cash charge of $559 million in its 3Q.

On the regulatory front, UPS continues to manage investigations and allegations of anti-competitive practices across the U.S., Latin America and Europe, according to UPS' most recent 10-Q filing. The company is unable to determine the financial loss, if any, from the investigations, and UPS continues to "vigorously defend" itself from accusations of alleged anticompetitive practices, the filing states. 

Despite those uncertainties, UPS investors could position themselves for a solid finish to the year when the company reports its 4Q results in January, as on the most recent earnings conference call UPS executives said they expect in the next quarter to "hit on all cylinders," according to an article in Barron's.

Tech Influence

The technology industry is having a transforming effect on the way that direction of transportation companies. This has never been so apparent as now, given the recent partnership between shipping giant Fed Ex (FDX) and diversified technology giant eBay (NASDAQ: EBAY).

FedEx and eBay have joined forces in a move to capture some of the market share from rival Amazon.com by offering customers discounted delivery service and the convenience of label printing, according to a recent article on the Bloomberg website.

The pair is attempting to further leverage the forthcoming momentum in the holiday season and to win Amazon shoppers over by offering steep shipping discounts of as much as 37 percent. The label-printing option is a new feature for FedEx customers although eBay already uses this option for its USPS customers. At the heart of the discount and labeling push is a fiercely competitive offer at Amazon.com, which, for a one-time annual fee, provides free 2-day shipping, according to Bloomberg.

In an October Investor/Lender presentation, FedEx outlined a bullish plan for the future, including target profit improvments through Fiscal 2016, cost reductions and named some specific goals, including: 

  • attaining a profit margin of more than10-percent
  • growing earnings 10-to-15 percent annually
  • improving cash flow
  • lifting the dividend

For its part, eBay grew both top-line and bottom-line results in the 3Q versus year-ago results amid a surge stemming from its its PayPal business -- which is expected to continue. The tech company generated $1.2 billion in operating cash flow and $792 million in free cash flow in the quarter.

No doubt the global economic slowdown has impacted profits for the transportation sector, including the troubled USPS. As long as these companies continue to innovate by using technology to their advantage and focus on the areas of growth that they can control, economic pressures from around the world should eventually subside. While a USPS IPO would be historic, and would change the face of mail delivery as we know it, privatization would only place a brighter spotlight on financial performance.


GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of FedEx. Motley Fool newsletter services recommend eBay, 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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