Deja Vu All Over Again

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

The U.S. government created the U.S. Postal Service in 1775 and was also instrumental in funding the development of the internet during the late 20th century.  In an ironic twist, the mass adoption of the latter’s email applications have led to a continuous decline in the demand for the former’s products.  While most businesses would quickly restructure their operations, the Postal Service’s mandate and inflexible labor agreements have ensured poor financial performance recently.  In its latest fiscal year, the organization reported a 5% decline in total mail volume and an adjusted operating loss of $4.8 billion.  While the Postal Service announced a new, 5 year restructuring plan in February, the divergent wishes of its many stakeholders will make change difficult.

Follow the Private Sector

While the Postal Service remains inefficient, the nation’s two largest delivery companies, FedEx (NYSE: FDX) and UPS (NYSE: UPS), continue to invest in their businesses, upgrade their fleets, and expand into international markets.  Both companies recognized the value of having vast distribution networks and they each currently deliver packages to roughly 220 countries throughout the world.  They have also been primary beneficiaries of the rapid growth in online commerce and the corresponding increase in shipments of goods.

Founded in 1907, UPS is the world’s largest package delivery company operating through 5,000 UPS stores, 1,000 customer centers, and 800 logistics facilities.  In its latest fiscal year, it reported revenues and operating income of $53.1 billion and $6.1 billion, increases of 7.2% and 7.8%, respectively, versus the prior year.  The company delivered 15.8 million packages per day with its fleet of over 500 aircraft and over 100,000 vehicles.  Despite higher fuel costs, the company offset some of the commodity inflation through surcharges, as its average revenue per parcel rose 5.6% during the period.

Similarly, FedEx offers a comprehensive suite of delivery services through 58,000 drop off locations, including 4,000 FedEx Office Centers.  It has been aggressively expanding internationally into emerging growth markets, such as Brazil, Poland, and Mexico.  In its latest fiscal year, the company reported revenues and operating income of $42.7 billion and $3.2 billion, increases of 8.6% and 34.0%, respectively, compared to the prior year.  FedEx enjoyed rising volumes across its business lines as well as higher average prices.  In addition, its operating margins increased as fuel surcharges offset higher commodity prices and profitability in its freight segment, which rebounded as a result of recent restructuring activities.

A Promising Opportunity

Over the long run, an investor would likely do fine with either of these forward-thinking transportation companies.  However, another opportunity is also intriguing.  The Postal Service’s future restructuring will need to include a reduction in locations and outsourcing of some services to third parties.  These changes should benefit the business of (NASDAQ: STMP), a provider of internet-based postage solutions.

Founded in 1996, the company has 400,000 monthly subscribers and was the first software-only service to be approved by the Postal Service. allows customers to print electronic stamps and turn digital photos, designs, and images into valid postage.  Its service is especially valuable for small businesses and high volume shippers that can integrate the company’s software into their order databases.  In its latest fiscal year, reported revenues and operating income of $101.6 million and $17.2 million, increases of 18.8% and 1076.0%, respectively, over the prior year.  It benefited from a 50% increase in the total amount of postage printed, as well as double digit increases in the number of customers and average transaction prices.

Looking Ahead

In the first nine months of FY2012, has continued to generate strong financial results, with increases in revenues and operating income of 15.1% and 37.1%, respectively, versus the prior year period.  The company’s customer base has expanded an additional 12%, due in part to its  favorable  position as a postage provider for Amazon’s Marketplace. The total amount of postage printed by its customers has gained an additional 62% this year and operating margins have benefited from higher margin sales add-ons, including delivery insurance. The company should gain further business as more customers see the value and convenience of using its products.  It is definitely one for the portfolio.

rghanley owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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