The FedEx and UPS Holiday Mystery
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
December 10 was the busiest day of the year for FedEx (NYSE: FDX), who shipped 19 million packages in that one day alone. It’s the holiday season for shipping companies too, and with online shopping at all time highs, does the season look to be jolly for FedEx and UPS (NYSE: UPS)?
You would think that these unbelievably high volumes of packages would send both companies’ stocks through the roof. To be honest, neither earnings nor stock price tend to do any sort of special stock jumps in the holiday season. It surprises me too, but there is method to the madness.
The reason is that typical ground shipping is actually a relatively small percentage of the revenue of these companies, compared to what you make think. Where these companies revenue really does come from is both international and business shipping. So, even with ground shipping volumes at yearly highs, business to business shipping, one of their main revenue sources, actually decreases during the holidays.
The other main killer is on a much more global scale: where FedEx and UPS really bring home the bacon is with international shipments. Countries like China and continents like Europe are responsible for so much international shipping, and that is where these companies truly profit. However, with economic issues in both Europe and China, two of the biggest markets for international shipping, volume is far lower than FedEx and UPS had hoped for.
Fuel prices going up also hurts the profitability from both FedEx and UPS ground services, but especially international shipping. Jet fuel costs rising have increased costs dramatically, resulting in higher expenses for consumers, who, as a result, don’t ship as much, or maybe ship at a less expensive rate and take the hit of waiting an extra day or too.
A similar phenomenon is hitting the business to business shipping sector, where business that are eager to cut costs to seek profitability in such a tough economic time decide that maybe they can afford to wait an extra few days and say no to overnight or 2-day shipping. Such decisions are decreasing fast-shipping volume.
One option often thrown around during the holidays is the ever-perplexing question: why can’t these companies do same day shipping? They have trucks driving up and down your neighborhood every day, so why can’t they deliver on the same day, especially in metropolitan areas? Honestly, these shipping giants just don’t have the infrastructure to make this realistic. Although, an experimental new launch by eBay (NASDAQ: EBAY) called eBay Now actually provides same day shipping to customers. eBay pays people to sit and wait until customers make purchases, at which point these waiting people essentially go out and buy the product at a local store and deliver it to the buyer. It is a very new service, although, unsurprisingly, there is lots of skepticism.
So, even though FedEx and UPS ground are actually thriving this holiday season, the real answer for why these stocks aren’t popping is because of decreased business to business and international shipping. And, while these issues continue, don’t count on FedEx or UPS to bring in dramatic results for you or your portfolio.
Michael Nolan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!