Analysis: Neither Trump Nor Congress Can Do Much To Alter Amazon's Post Office Rates

Amazon.com, Inc. AMZN stock has been under heavy selling pressure after President Donald Trump repeatedly bashed the company for what he said is favorable tax treatment and USPS subsidies. Despite investor concerns about new regulations, Wall Street analysts said Trump’s tweets are more noise than fundamental catalyst.

Argus analyst Jim Kelleher reiterated a Buy rating and $1,550 price target for Amazon on Tuesday.

Tweets don't change Amazon’s business model, Kelleher said, and Trump's accusations about the company's tax payments are inaccurate. Amazon seems to be paying market rates for shipping, he said.

“Given Amazon's multiple other shipping options, we believe that efforts to discourage Amazon's use of the USPS would ultimately hurt the agency's half a million-plus employees much more than it would hurt Amazon."

How USPS Pricing Actually Works

The Postal Regulatory Commission regularly reviews USPS rates and fees, spokeswoman Gail Adams told Benzinga in an email.

"The PRC reviews competitive product rates and fees to ensure they are competitive (as opposed to market dominant) and in compliance with the law," Adams said. Rates and costs for each agreement are reviewed annually via the commission’s Annual Compliance Determination.

The commission's role is to ensure that revenue for each competitive product — including negtoiated service agreements such as the agency's agreement with Amazon — exceeds its attributable costs, Adams said.

"Competitive products collectively are required to contribute an appropriate share to the Postal Service’s institutional costs," or those costs not caused by any particular product or class, Adams said.

"The overwhelming majority of NSAs with the Postal Service have both covered their attributable costs and complied with the statutory requirements. In those cases where they do not, the commission orders appropriate remedial action."

In other words: the post office cannot subsidize competitive products and requires each product to cover its cost and a share of the service's institutional costs.

A source directly involved with the Amazon-USPS partnership told Benzinga on March 29 that "not only do Amazon packages cover their own costs, but they help keep the overall service alive."

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Analysts: Trump Powerless

In a nutshell, Argus analyst Kelleher said Trump's options for targeting Amazon with changes to tax policy or USPS policy would likely have limited impact.

Height Capital Markets analyst Stefanie Miller agrees that Trump is virtually powerless over Amazon's USPS rates.

"Trump claimed the United States Postal Service is losing $1.50 per Amazon shipment, an assertion which we believe is incorrect," Miller said in a note. "While Trump may continue to batter Amazon with tweets, his inability to direct changes in government policies at the USPS or the Commission means Amazon does not face tangible risks from White House-driven increases to USPS rates."

Buy The Dip

At the same time, Amazon’s double-digit earnings growth and projected 80-percent EPS growth over the next two years paint the picture of a very healthy company. Investors should take advantage of the Trump drama and buy the dip, said Argus' Kelleher. 

Amazon’s exposure to high-secular-growth markets, such as cloud computing and e-commerce, make it an essential component of most long-term investment portfolios, the analyst said. 

Amazon stock stabilized a bit on Wednesday, trading around $1,400 a share. The stock remains down 7.5 percent in the past month.

Taylor Cox contributed to this report.

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