Package Deal: UPS' IPO Could Put Delivery Companies in Play

It's a high-growth business with a few too many players.
Publish date:

Big Brown (a.k.a. package-delivery giant

United Parcel Service

) is finally going public, so get ready for umpteen variations of the following sales pitch: The dot-coms are slaughtering each other to gain market share. But every item you buy online is money in the pocket of the company that delivers it. So dump


(EBAY) - Get Report

and buy UPS, and maybe a little


(FDX) - Get Report


Very smooth, very logical -- but only partially true. The dot-coms' competitive issues are pretty well known by now. But it doesn't necessarily follow that the boom in e-commerce is a gravy train for the package delivery biz. Think about it: Clothes, computers and


are already being moved from factory to warehouse to store. So sending them from factory to home isn't much of an incremental pop in the overall shipping budget. And some things -- such as books, CDs and business documents -- won't always be shipped in tomorrow's high-bandwidth world. They'll just be downloaded or e-faxed.

So if package delivery isn't a pure e-commerce play, why care about it? Two reasons, says Alex Brand, an analyst with regional broker

Scott & Stringfellow

in Richmond, Va., who's been covering the sector for more than a decade. First, as world trade expands, the amount of stuff being moved is growing faster than the amount of stuff being produced. Air freight and package delivery -- assuming the global recovery is for real -- are logical beneficiaries.

Second, the industry is ripe for consolidation. "There are probably 20 large players out there, and over the long run that's way too many," Brand says. "You're going to end up with maybe five." So the big guys will keep extending their reach, the way UPS did recently when it acquired

Challenge Air Cargo

, the largest cargo airline serving Latin America.

Add it all up and you've got a messy but potentially high-growth business on the verge of some serious M&A. The catalyst, says Brand, might be UPS' initial public offering: "They're going to put everybody in play."

Now let's separate the sharks from the minnows:

UPS, which will be listed on the

New York Stock Exchange

, is the undisputed king of package delivery. It has 330,000 employees, 149,000 trucks and 500 planes, and claims that its system carries goods worth 6% of the U.S. gross domestic product. Its database is bigger than the

Census Bureau's

, its revenue exceeds $25 billion a year and its profit approaches $2 billion. It's by far the biggest player in the home delivery (i.e. e-commerce) side of the business. According to one study, UPS handled 55% of last year's holiday e-commerce traffic, followed by the

U.S. Postal Service's


FDX is huge too, with revenue of $17 billion and earnings of $631 million. But unlike UPS, which was built from the ground (i.e. the truck fleet) up, FDX was built from the air down, with a focus on moving those familiar red, white and blue envelopes between businesses. It's getting into residential delivery via its RPS division. But because this is way more expensive than just dropping a truckload off at an office complex, early results have been mixed.

For a while, the market treated FDX like an e-commerce play. But the


(AMZN) - Get Report

-type numbers didn't materialize, and now it trades like a cyclical industrial company, something which has to worry UPS and its investment bankers.

CNF Transportation

(CNF) - Get Report

has a nice gig delivering the Postal Service's second-day priority and next-day express mail. Its

Emory Worldwide

division is a major player in air freight, while its

Con-Way Transportation

is one of the biggest domestic truckers. But its sales growth has averaged only 1% a year since 1993, which might explain why its market cap is only $1.7 billion, despite annual sales of more than $5 billion.

Airborne Freight


, more commonly known as

Airborne Express

, is No. 3 in U.S. air-freight shipping, behind FDX and UPS. It operates more than 100 planes and 15,000 trucks, has revenue of $3 billion and a market cap of about $1 billion.

The minnows, all of which have valuable franchises but market caps below $1 billion, include

Air Express International



AirNet Systems



Aramex International



Atlas Air

(CGO) - Get Report


Eagle USA Airfreight

(EUSA) - Get Report


Circle International



Kitty Hawk



Pittston BAX Group



Two other things to watch: the price of oil and the actions of the Postal Service. Oil, obviously, affects the cost of operating all those planes and trucks. If it falls, these stocks pop. The Postal Service -- from the industry's perspective, at least -- is using its monopoly on first-class postage to unfairly subsidize its package delivery service. If it expands from here, that's bad.

And as you've probably noticed, this column has ignored the whole database management side of the business. That's not because it isn't important. Just the opposite. To move billions of packages on time and at a profit, UPS and FDX are building some of the most sophisticated information systems on the planet. And they're selling this capability to their big customers, something which might make them e-commerce plays after all.

But this side of the business has a whole different cast of characters, so it deserves a column of its own. Look for it in November -- about the time UPS goes public.

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at