Transportation In the Spotlight

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

The United States Postal Service has made it official -- no more Saturday letter deliveries. The decision is not a total shock, as scuttlebutt about a five-day work-week been discussed for years. The USPS is expected to attain a savings of some $2 billion each year by eliminating weekend delivery of first class mail. Package deliver, however, will continue on a six-day per week basis. Were the U.S. postal service's package delivery not such a money maker, the Saturday business could have gone to United Parcel Service (NYSE: UPS) or FedEx (NYSE: FDX), both of which could use the extra income.

UPS would have gladly picked up the new shipping volume with its new, environmentally friendly fleet of vehicles. In California, UPS recently deployed fleet of 100 fully-electric commercial vehicles for package delivery. The electric trucks were built in California and are dedicated to package delivery in the state in response to California Governor Jerry Brown's call for zero-emission vehicles.

Economic Headwinds

If the adage that as goes transportation so goes the economy is true, UPS' recent prediction for a "below trend" recovery in the global economy is sobering. 

In its 4Q, UPS reported a loss of $1.75 billion, or ($1.83) per share, on a GAAP basis, while revenues climbed nearly 3% to $14.5 billion. Excluding pension mark-to-market charges, the company reported quarterly earnings of $1.32 per share on an adjusted basis. UPS expects earnings growth of between 6-12% in 2013 although those projections fall below consensus estimates. The company's global trade business has been plagued by lower-cost alternatives that are stealing away shipping business for items such as electronics.

It hasn't been easy treading for UPS. In January, the company was forced to abandon its plans to acquire Dutch transportation company TNT Express just as it was intending to close the deal. UPS' $6.2 billion bid for the company ended when European regulators rejected the merger amid concerns for the competitive landscape. UPS executives will instead direct $4 billion of the company's $5.4 billion in cash flow into share repurchases in 2013, which is up from $1.6 billion spent on share buybacks last year.

FedEx has been facing headwinds of its own amid a weakened global economy that has pushed customers, partuclarly for airfreight deliveries, toward lower-cost providers. FedEx is in the midst of a corporate restructuring, which includes the ongoing modernization of its transportation fleet, through which it expects to achieve $1.7 billion in benefits by fiscal year 2016.

The slowdown in transportation extends to railroad stocks, where in the 4Q Norfolk Southern (NYSE: NSC) reported a 14% profit decline as a result of weak fundamentals in coal. Coal demand has waned amid rising competition from natural gas, which hurts Norfolk's Southern electricity business and triggered a 23% decline in 4Q coal revenues. The soft global economy has hurt Norfolk Southern's commodity export volumes in items such as corn and ethanol in recent quarters. The company is experiencing rising volumes in other segments, however, including chemicals, auto and housing.

Norfolk Southern is focused on returning value to shareholders via dividends and its target dividend payment  is one-third of earnings. In August, the company increased its quarterly dividend by 6% to $0.50 per share.

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Sharing the Love

While chocolate might spring to mind when it comes to the holiday for sweethearts, there is also an opportunity for transportation companies. Valentines Day is a $18.6 billion market opportunity, according to the National Retail Federation. The average individual will spend $130.97 on Valentines Day this year, which is a modest increase over last years levels of $126.03 per person. More than one quarter of shoppers will make their purchases online, according to UPS, which bodes well for transportation companies. Last February leading up to Valentines Day, shares of UPS only got a modest pop of less than 1% while Fed Ex shares climbed 3%. 

The Valentines Day-pop may not be the long-term solution that transportation companies need for the bigger picture but at the very least -- if stock price rise once again this month -- the gains could provide some short-term profits for shareholders.


GerelynT has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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