Analysis: US Postal Service, Built To Deliver Letters, Struggles To Compete In Package Delivery

The United States Postal Service reported a 2017 net loss of $814 million Tuesday representing a $1.4 billion annual decline.

Some may read this “bad to worse” trajectory as a negative for parcel peers, but FedEx Corporation FDX and United Parcel Service, Inc. UPS could actually catch a tailwind off the federal rival’s nosedive.

The Rating

Bernstein analyst David Vernon maintains a Market Perform rating on FedEx with a $212 price target and an Outperform rating on UPS with a $132 price target.

The Thesis

The package business has proven too expensive for USPS’s small-scale operations, slowing mail deliverers and cutting into margins.

“We see the company's addition of high marginal cost stops as both a clear indication that the company lacks the capacity and the ability to grow its way out of loss with small package volume, and as further evidence that the company is woefully underpricing its commercial delivery services,” Vernon wrote in a Wednesday note.

USPS management, which had attempted to cut losses this year by raising parcel rates between 8 and 9 percent, conceded on the earnings call that the “business model is broken.”

Their efforts to restore profitability are expected boons to competing delivery services.

“As the cost of final mile delivery increases, pricing for residential services should improve which will benefit the more productive networks of UPS and FDX,” Vernon wrote.

Price Change

Both FedEx and UPS traded down on the USPS’s financial report. At time of publication, FedEx was down 2.3 percent at $214.78, while UPS was down 0.9 percent at $112.95.

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