FedEx Wants to Squeeze Money From a Turnip
UPS says it is raising shipping rates at its North American freight division this month, by 6.9%. On Monday, FedEx decided to follow suit, cheekily announcing a six-point-eight percent (what a bargain!) increase in the amount it charges at FedEx Freight. On one hand, this is probably good news for folks who invest in companies that compete with FedEx and UPS -- less-than-truckload-weight shippers such as YRC Wolrdwide (NAS: YRCW) , Con-way (NYS: CNW) , and Old Dominion Freight Line (NAS: ODFL) . These shippers now have the option of grabbing market share by undercutting their rivals' just-increased prices, or grabbing extra profit margin by falling in line with the higher prices. It seems a battle could be in the works.
On the other hand, though, it does seem a bit strange that FedEx and UPS think the moment the global economy implodes is the precise best time to raise their own prices ... the more so when you consider that both companies are already going gangbusters, in terms of profits. I mean, FedEx just got finished reporting its most profitable quarter since June 2007. UPS just posted a 25% pop in year-over-year quarterly profit. And now they tell customers they need to charge even more money for their services? Seems to me they really are running some risk of losing market share in reaching for extra profits.
Then again, maybe now really is a good time to make the move. After all, the U.S. Postal Service just announced the next thing to a going-out-of-business sale, shuttering 3,700 post offices in addition to the usual rumblings about cutting Saturday service and raising stamp prices. While not a direct competitor to LTL shipping, it's clear that the competitive environment for UPS and FedEx is opening up -- and the fewer the competitors, the fewer reasons to worry that customers will go elsewhere.
So what's the upshot for investors? At 16 times earnings and an 11% long-term growth rate, UPS's rate increase probably doesn't move the valuation needle much. FedEx, however, sells for an equally attractive 17 times earnings -- and was pegged for 16% growth before this week's price increase. Long story short, FedEx just got 6.8% closer to being a bargain.
Even if FedEx and UPS lose cost-conscious customers from this move, will they make it up on margin?Add both stocks to your Fool Watchlist, and find out.
At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any stock named above. The Motley Fool owns shares of FedEx and United Parcel Service.Motley Fool newsletter serviceshave recommended buying shares of FedEx.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. . The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.