Shipping stocks like Stamps.com could get a RTS this week
Knock knock, it’s the Presidential task force for shipping and mailing, and they have a sealed package. No, it’s not a stuffed llama from a forgotten Shopify ($SHOP) purchase, it’s a recommendation on US Postal Service rates.
A major target of the White House as of late as been Amazon ($AMZN), and a tweet sent on 3/21 from the President’s Twitter account sum up the current administration’s feeling towards the company. The tweet states (in part) “it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon.” (Link to Tweet: https://twitter.com/realDonaldTrump/status/980063581592047617)
Surprises from this Postal Task Force could have an impact on the recent target Amazon, but could affect companies (obviously) like FedEx ($FDX), UPS ($UPS), and the above mentioned Stamps.com ($STMP).
Why the USPS is losing money on shipping
The USPS is losing money for several reasons, most notably the ones below:
- Email has significantly reduced the need to send paper letters, with the majority of companies that have recurring billing offering some type of “paperless” billing.
- Postal mail has been declining in recent years
- Parcel mail, however, has been slowly creeping up, but it is bulky and heavy, requiring a much larger footprint than postal mail, and reduces the “revenue per square inch” of postal trucks and facilities
- Overfunded pensions (105% overfunded), and the USPS Office of Personnel Management isn’t allowed to send money back (that would take an act of congress)
Buy more shipping stocks
Using USPS for “last mile” and local delivery has been a tried and true strategy for Amazon so far, hence why it has come into the cross-hairs of the White House. If you see an increase in USPS rates, you could see impacts to the obvious Stamps.com, but look at companies relying on cheap shipping. Etsy ($ETSY), eBay ($EBAY), Shopify ($SHOP), and PayPal ($PYPL) all have independent sellers who rely on cheap shipping to help move goods, and a reduction in goods purchased will have an impact on bottom lines.
Playing Stamps.com and shipping services directly
Right now, Stamps.com ($STMP) is a cash machine, and utilizing a 5 YR Discounted Cash Flow model, we show a 56% upside to the current share price of $261.45 (as of EoD 8/3/18), to a price target of $408.05. A blend of models we use puts it at a fair value of $317.16 a share, or just above a 21% increase.
Buying 17 JAN 2020 $320 CALL and the stock hitting $320 by 16th of June 2019 (almost a year from now) you would see a 26.8% return on your money, and an $825 profit off of one contract. Being extra bullish on $STMP and it hitting $378 by the 2nd of October 2019 would net you $1,377, or a nice and healthy 89.7% return on your money.
Now, the opposite side, if you think that shipping volume will be hampered by the task force recommendation from increased USPS prices, you can short the stock. Looking at a revenue multiple valuation, the stock has an approximate 15% downside, and a target price of $222.28 a share.