What can brown do for you?� How about turbocharging a portfolio that is stuck in the red?� United Parcel Service, Inc. (UPS) has been caught up in the decline of the economy, but perhaps its fortunes are changing.
On Monday, Deutsch Post’s DHL announced that it was making significant reductions in its scope by cutting jobs and reducing air and ground operations in the United States.�The company will also reduce a joint venture with UPS that was announced last May.
Losing the breadth of the $1 billion in annual revenue deal looks to be a blow for UPS.� That may be true in the short run, but in the long run the reduction in competition should be a big bonus for both UPS and competitor Federal Express (FDX).
When this economy does indeed recover, UPS and FDX will be more easily able to raise prices with the exit of DHL domestically.
Less competition is always better for companies as profit margins tend to be higher.� Investors would agree as UPS was higher on Monday with the DHL news.� Given the potential loss in revenue from the joint venture with DHL, this reaction is surprising.
I guess that is the nature of UPS.� Investors stuck with the company even when high oil prices were threatening anything to do with transportation.� Instead, shares of UPS stayed even for the first six months of the year. (See also: "UPS Delivers Bad News.")
UPS did finally succumb in June when oil seemed to be going up a dollar or more every day.� Shares lost about $10 to trade at about $60 per share when oil prices peaked in early July.
The decline in oil led to a recovery in UPS, and by early September shares were nearly at $70.� Things were looking up until the credit crisis reared its ugly head.� The implication of the financial crisis would be a slowing economy.
As such, investors sold off stocks tied to business activity, including UPS.� At the bottom, UPS hit $43.32.� Things are looking bleak for UPS especially if the economy slows significantly.� A long and deep recession would not be good for business.
Interesting, UPS has rallied nearly $10 higher since the lows under the assumption that the worst was behind us.� That momentum continued today with the DHL news.
Shares of UPS now trade for a bit more than 15 times December, 2008 expected earnings.� Given that estimates now only show a small gain in profits for 2009, UPS appears to be fairly valued in the short term.
The biggest reason for UPS doing so well is the collapse in oil prices.� That isn’t enough justification to own the stock in the long run.� The DHL news is positive in the long run, but I would rather acquire shares of UPS at lower prices.
Check out Navellier’s PortfolioGrader.� He has UPS rated a C or hold.� You can rate any of your stocks using this incredibly valuable tool.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
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