Investors cannot overlook the value of an oligopoly. With little competition to fight off, these companies have above-average chances for strong returns over the long term.
Think about it -- when you want to send a package, what services immediately leap to mind? I can think of four: The Post Office, FedEx (FDX), UPS (UPS), and DHL Express. As far as international carriers go, and certainly with domestic ones, that's all there is as far as holding significantmarket share.
The competition that does exist is essentially a commodity, and customers will really only examine three things when deciding which carrier to choose: price, service, and reliability. Prices vary wildly depending on the size and weight of the package, distance to travel and level of haste desired. I know from personal experience that I always check all four services for price. When it comes to service, however, the price has to be a tremendous bargain for me to set foot in the post office, with its understaffed counters and long lines. Time is money to everyone, after all. That's probably the reason why the Post Office is losing money hand over fist.
When it comes to picking between these companies for an investment, my favorite is UPS. One thing UPS has going for it is a global brand name, and that power must never be underestimated. The company came to the marketing game later than FedEx, so it's had to play catch up. But UPS' signature ubiquitous brown trucks and "What Can Brown Do For You?" campaign have helped the company surge, along with the then-largest IPO ever in 1999, which significantly raised its profile.
Companies in the transportation business have challenges that most others don't. Gas prices are much higher today than they used to be, and even though UPS might pass on some of those costs, they still need to conserve. There's also the consideration of delivering items quickly. Believe it or not, things like this get covered in training for UPS drivers. The training literally includes planning out drivers' routes so as to make more right turns (waiting for left turns wastes gas), carrying keys on their ring finger (so as to more efficiently start the truck), and walking quickly. Truth be told, that right turn gimmick saves 30 million miles of travel.
The economy has hurt delivery services, but UPS still made $3 billion in 2008 and $2.1 billion in 2009. That's where being an oligopoly comes in handy. The company carries $7 billion in very cheap debt (at about 6.5% interest), and easily meets its $445 million debt service payments with earnings. Free cash flow was downright explosive in 2008 and 2009: $5.8 billion and $3.9 billion, respectively.
Action To Take --> UPS remains a growth story, even after 102 years in the business. And once the global economy recovers, the company should fire on all cylinders. Analysts expect UPS to roar back, projecting a +40% earnings increase in 2010, +22% in 2011 and +14% annually during the next five years. It's a big buy.
-- Frederick M. Steier
Disclosure: Frederick Steier does not own shares of any security mentioned in this article.