We might think that given how much more stuff that people are ordering online now, the USPS would be enjoying a bountiful harvest. They are instead on life support.
The mega recession of 2020 has been an unusual one, where we usually see such a thing sink all boats in the aftermath of a slowing economy that usually distributes its pain fairly evenly, or at least touches everyone enough to create bearish conditions.
That’s the way thing normally go at least, where stocks are traded a lot together in major indexes and also has big institutional investors using more of a general strategy in pulling back their positions. The 2008 crash bashed everything, and even though financial stocks took the worst beating, since this was the sector that suffered the most in the real world, this was no time to be long any stock as they all got taken out to sea by such a strong undertow.
We saw the same thing happen with the crash of 2020, where even Amazon stock lost a quarter of their value at a time where the outlook for the company rose tremendously from seeing much of their competition shuttered and placing them in a position to really grow their business, which they did.
In the aftermath, once the panic selling stopped and the market started to get its bearings after striking its head on the cement so hard, this created a big divide between the haves, the Amazons and other companies whose business outlook was actually improved by this, and the have-nots, companies that were left badly injured, with their business being seriously infected by COVID-19.
Among the businesses that have had immunity to this virus are businesses like technology, something this crisis has us spending even more money on, as well as companies that can sell things without needing to do so through physical stores, like Amazon. All these extra parcels need to be delivered, as we move from going to pick something up ourselves to having it shipped directly to us.
Two of the top three package delivery companies have done very well so far in 2020, as have their stocks. FedEx stock is up 20% in a year that has been negative for stocks overall, with UPS doing even better with their 33% gain so far in 2020. None of this is any surprise, but how the United States Postal Service, the third big player in this game, has done tells a completely different story, and one that is very concerning.
The USPS is a government agency and therefore does not trade on stock exchanges or even have any shares owned by anyone other than the government, who owns it all. The USPS has been an independent government agency even before the United States was born, being founded in 1775 with Benjamin Franklin acting as its first Postmaster General.
If USPS stock was traded, the stock would be in significant trouble, not just from seeing their ugly bottom line so far in 2020, but especially when the CEO tells us that the organization is “in a financially unsustainable position absent significant fundamental change,” as Postmaster General and CEO Louis DeJoy shared on Friday in the face of more massive losses.
The Postal Service has been on the ropes for a while, and while they have been able to parry some of the punches thrown at them, they had already taken a real beating before this year, and it is this continuing on without any real resolution that has them in such bad shape right now.
It is not that the USPS hasn’t benefited from all that extra shipping that has been going on lately though. In the last quarter, the third quarter fiscally for them, their revenue from package volume has risen by 50% year over year. Revenue and profit are brothers but do not always travel together, and in the case of USPS, it is the lack of margin that is killing them slowly, with the pace of this really picking up this year.
The USPS Has Been Bleeding Money for a Long Time, But Not This Much
The USPS is no stranger to massive losses, and has been losing money overall for a very long time, but unlike many government agencies, their losses are not just budgeted for and transferred to the general debt. They did receive $10 billion worth of loans under the CARES act, taking their debt to $24 billion, but this is money that needs to be paid back at some point, which is hard to do when you run into the hole more and more each year.
While it is hard to imagine the United States getting rid of its postal service, which still plays a significant role in spite of the dramatic changes that we have seen in the way we communicate today, if they are indeed to survive, we may need to see some big changes in how they do business, which new CEO DeJoy recognizes.
This is the first quarter at the helm for DeJoy, and while the story that their balance sheet tells is still out of a horror movie, he at least has designs on reducing the horror even though this may involve some things getting slashed.
The real problem with the USPS is that their primary business, delivering the mail, has simply gone out of style. For all of this time until lately, letter mail has been the primary means of delivering paper documents. This is just not the case anymore, and with a mandate that has been created in times well gone by, to maintain a delivery standard for mail delivery, may no longer be practical and is at the top of the list of the things that need to be rethought.
FedEx and UPS don’t have to deliver letter mail though, and especially don’t have to deliver it in rural areas where the price of the service is so horribly underpriced. The do deliver documents, but on their terms and at the right price. The U.S. has avoided pricing letter mail according to the cost of the service, and also has steered well clear of regional pricing differentials, but they may soon have to in order to survive, among other changes.
If this was a public company, the USPS would probably want to spin off their package delivery service, to isolate it from the money pit that the postal service is so well known for, the delivery of what we call the mail. Volumes have declined so much that we may already be in a situation where continuing it without losing a lot of money on it may no longer be possible, even if they did price the service properly.
There are a lot of fixed costs involved in mail delivery, all those mail carriers for instance, all those sorting facilities, and everything else that you need a critical amount of to be able to perform the service at all.
The USPS still only charges 55 cents for a postage stamp for first class mail 1 oz or under, with 50 cents for metered mail and 35 cents for a postcard. If we imagine how much goes into such a thing, from being picked up at the source, being handled so many times, and then having to pay someone to deliver it, that’s not much at all for what you get.
The USPS Must Both Serve and Survive
While the USPS is a public service as well as a business, the public service pledge has caused the business side of things to become bashed to within an inch of its life, and when you see the CEO speak of how near they are to death now, someone who is paid to try to put a positive spin on things whenever possible, this tells us how grim things actually are.
What perhaps should scare us the most about this recent quarterly report from the Postal Service is that revenue in this quarter actually went up compared to the same quarter last year, so business overall has actually picked up, in spite of how much revenue from all other sources besides package delivery has dropped. Package delivery has more than picked up the slack, yet the USPS still posted a quarterly loss of $2.2 billion to go along with the $4.5 billion they lost the quarter before.
It shouldn’t be too hard to figure out that if revenue and losses go up together, this can only mean that your costs have gone up a lot as well. The USPS is not a for profit company, but whether or not profit is the goal, you have to make enough back to keep the ship afloat, and the USPS is sinking.
DeJoy is in the unenviable position of taking over the captaincy of a business that is in deep trouble, with the outlook on the horizon looking just as bleak. There’s only so much that they can take, but at least the new captain is inspecting the ship more closely than has been the norm and is taking all that water coming in at least a bit more seriously than his predecessors.
Some point out in their defense that the USPS has stricter requirements for funding their pensions and health insurance, where they are actually required to keep them funded, this could be easily argued to be the prudent thing to do, where at most we may want to worry about the organizations that do not do this. Businesses may go under on account of these things, like what happened to GM, but the postal service can’t be brought down by things like pension obligations, because there’s no one to take over for them.
This still leaves the problem of their needing to stop their balance sheets bleeding so much red ink, a task which will require that they set aside their ideals enough to give themselves a chance to live. They do choose to not profit from mail delivery, and have an obligation to keep delivering it, but they need to realize that there is a corresponding obligation for their customers to cover their costs if this relationship is to be maintained long-term.
The announcement of USPS quarterly results actually put up the stock prices of UPS and FedEx, due to investors being excited about the great results the USPS had with their package deliveries, suggesting that the results of their competitors may be better than expected as well.
However, the USPS is a much different beast, and this is the second quarterly earnings report, with earnings being used very loosely with this gang, the CEO at the time also warned us of an existential crisis brewing.
At least some of these losses have been caused by temporary things such as the increased cost of labor and transportation that the pandemic has inspired, this only means that they may expect the amount of water entering their ship to decrease, but forecasts still have them taking on more than they can bear at a time where their capacity to bear this diminishes by the day.
The USPS will have to make some hard choices to move them away from being a white elephant that is getting so sick now that even the people who run it are sounding the alarm. Hopefully their leaders can finally find the courage to at least move this ship away from its course of sailing off the edge of the world, as they will need to eventually.