What's New: Although the USPS has made significant strides to improve service and profitability in recent years, the downturn has put the USPS on track to lose $6-$10B this year. The USPS has laid out several initiatives that go a long way in addressing budget shortfalls including: reducing funding for retirement benefits, closing post offices, and eliminating Saturday service by as early as 2H/10. Most of the pressure is coming through the mail business (which does not compete directly with FDX and UPS), but efforts to right the ship could have broad implications for parcel.
Implications for FDX and UPS: 1) With so much excess capacity, USPS outsourcing of ground volumes to private carriers is highly unlikely; 2) a smaller footprint and elimination of Saturday service could offer market share and pricing oppty for private carriers; 3) Efforts by FDX and UPS to boost volumes cost effectively by using USPS for final mile delivery could erode margins and yields longer term.
Incrementally more positive on parcel, but we struggle with valuation and secular trends. We aren't against owning parcel stocks as estimates appear to have bottomed and the companies theoretically offer solid operating leverage to a recovery. Among parcel carriers, we prefer FDX's greater operating leverage to a volume recovery over UPS. That said, the stocks are trading at peak multiples (even on our above-consensus estimates), and the companies lack material auto and industrial exposure.
Negative secular trends could cause parcel mid-cycle margins to disappoint. DHL's exit from the US is a long-term positive, but we see a number of potential negative secular trends. 1) Cannibalization of premium products could limit density and pricing; 2) Slower global trade could slow int'l package growth, which has been a key driver of growth and margin expansion in recent years; 3) Lower margin B2C shipments are growing faster than B2B; 4) Higher fuel prices in a recovery could reduce shippers' appetite for expedited shipping and air products.
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Implications for FDX and UPS: 1) With so much excess capacity, USPS outsourcing of ground volumes to private carriers is highly unlikely; 2) a smaller footprint and elimination of Saturday service could offer market share and pricing oppty for private carriers; 3) Efforts by FDX and UPS to boost volumes cost effectively by using USPS for final mile delivery could erode margins and yields longer term.
Incrementally more positive on parcel, but we struggle with valuation and secular trends. We aren't against owning parcel stocks as estimates appear to have bottomed and the companies theoretically offer solid operating leverage to a recovery. Among parcel carriers, we prefer FDX's greater operating leverage to a volume recovery over UPS. That said, the stocks are trading at peak multiples (even on our above-consensus estimates), and the companies lack material auto and industrial exposure.
Negative secular trends could cause parcel mid-cycle margins to disappoint. DHL's exit from the US is a long-term positive, but we see a number of potential negative secular trends. 1) Cannibalization of premium products could limit density and pricing; 2) Slower global trade could slow int'l package growth, which has been a key driver of growth and margin expansion in recent years; 3) Lower margin B2C shipments are growing faster than B2B; 4) Higher fuel prices in a recovery could reduce shippers' appetite for expedited shipping and air products.
Click here for the full report!
This document is copyrighted by Morgan Stanley and is intended solely for the use of the Morgan Stanley client, individual, or entity to which it is addressed. This document may not be reproduced in any manner or re-distributed by any means to any person outside of the recipient's organization without the express consent of Morgan Stanley. By accepting this document you agree to be bound by the foregoing limitations.
This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. Morgan Stanley may advise the issuers mentioned herein or deal as a principal in or own or act as a market maker for securities/instruments mentioned herein. The research and other information provided herein speaks only as of its date. We have not undertaken, and will not undertake, any duty to update the research or information or otherwise advise you of changes in the research or information. This email message and any attachments are being sent by Morgan Stanley and may be confidential. If you are not the intended recipient, please notify the sender immediately by email an delete all copies of this message and any attachments.
