If the USPS Is In Trouble, Why Did Mailing Industry Stocks Rise Sharply?

Today the Postal Service reported its financial results for fiscal year 2012.    Headlines of the wire services and major newspapers all suggested that a calamity is just around the corner.

Bloomberg - U.S. Postal Service on a ‘Tightrope’ Lost $15.9 Billion

 

Washington Post - Postal losses cap year of payment defaults, little help from Congress; more red ink in 2013

 

Reuters – U.S. Postal Service has record loss, sees “fiscal cliff”

 

Wall Street Journal - U.S. Postal Service Reports Record Loss

 

Associated Press - Post office reports record loss of $15.9B for year

 

Pittsburgh Business Times – Postal Service: ‘Far short on liquidity’

 

How Did Postal Industry Stocks React?

Stocks of three firms, whose fortunes are tied to the Postal Service, Pitney Bowes, R.R. Donnelly, and Quad Graphics, traded heavily after the Postal Service announcement.  All three ended the day significantly higher on a day that there was no other news on the wire that could affect these company’s stock prices other than the Postal Service’s announcement of FY 2012 results.  These increases were   and the overall stock market was down. (Dow down 0.23%; S&P 500 down 0.16%; Nasdaq down 0.35%)

Update 11/16/2012 11:43 a.m.: All three stocks have given up much of their gains from Yesterday.  Pitney Bowes trading volume remains elevated but trading volume on the other two stocks seem to be returning to the mean.

Pitney Bowes (PBI)

Pitney Bowes is the largest manufacturer of postage meters in the United States and most of its revenue is associated with either equipment or services associated with producing and sorting mail.  Its stock had been setting new 52 week lows recently including a new one today.  However when the bell rang the end of trading Pitney Bowes stock was up 1.29% on volume that was 172% above the average volume traded daily.

R.R. Donnelley (RRD)

R.R. Donnelley is the largest printer in the United States and one of the largest customers of the Postal Service.  R.R. Donnelley stock has lost 40.35% this year and set a new low recently.    When the bell rang the end of trading, R.R. Donnelly stock was up 5.46% on volume that was 45% above the average volume traded daily.

Quad Graphics (QUAD)

Quad Graphics is the second largest printer in the United States.  Its stock has performed somewhat better this year as it is up 23.26% this year.  However, even with the gains this year its stock had not performed well recently and fell below the 200 day moving average yesterday.   When the bell rang the end of trading,  Quad Graphics stock was up 8.25% and rose back above the 200 day moving average on volume that was 73% above the average volume traded daily.  The 8.25% increase in Quad Graphics stock today with 8th largest among all stocks traded on the New York Stock Exchange.

Update 11/16/2012 11:43 a.m.: All three stocks have given up much of their gains from Yesterday.  Pitney Bowes trading volume remains elevated but trading volume on the other two stocks seem to be returning to the mean.

What about United Parcel Service and FedEx?

Neither United Parcel Service (UPS) nor FedEx (FDX) saw a spike in volume today.   The two companys’ stocks though did trade in different directions.

Both FedEx and United Parcel Service stock were down  at 10 a.m. UPS stock recovered and ended up 0.86% today but FedEx ended down 0.67%.  The trading pattern during the day suggested that the market believes that FedEx will be more seriously affected by the Postal Service’s financial problems than UPS.  FedEx stock traded down during the two hours after the Postal Service’s financial announcement hit the wire hitting bottom around the noon hour before regaining about half of what it had lost from the open. UPS’s stock did not react as much as FedEx’s stock did.

The difference in the potential impact on the two companies is clear

UPS is large customer of the Postal Service but derives only a small portion of its revenue from mail and parcels delivered by the Postal Service. UPS has touted its expanded use of Postal Service delivery in its last few earnings calls so it clearly sees the Postal Service as a core delivery service supplier and disruption in USPS services next October would make it difficult to continue to offer customers a delivery service that they desire.

UPS is a significant but modest sized supplier of air freight services to the Postal Service and is bidding to increase that share at the expense of FedEx. The Postal Service’s financial problems might increase the chance that it switches its air cargo supplier especially if UPS prices its air cargo service very aggressively.

FedEx is the Postal Service’s largest supplier and its largest parcel customer.    FedEx uses the Postal Service to deliver 30% of its FedEx Ground parcels so the continuing viability of the Postal Service as a delivery service is critical to FedEx’s ability to meet its customer’s service needs.

More important to FedEx is the potential impact of the Postal Service’s financial difficulties on the revenue and profits generated as a supplier of domestic air cargo service.  FedEx is defending this contract and the Postal Service’s financial problems likely will reduce the amount of air cargo capacity that the Postal Service will purchase.  The fierce competition with UPS both increases the risk that FedEx could lose its position as the Postal Service’s largest supplier as well as increases the likelihood that profit margins that FedEx would generate in a new contract would be lower if FedEx is successful in defending its position as a supplier.

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