United Parcel Service, Inc. (UPS)

TMFJoeInvestor (67.83) Submitted: 5/28/08 1:26 PM : Start Price: $69.94 UPS Score: 6.53

What can brown do for you? Well, I don't know about you, but I'm hoping it pads my CAPS score. Shares of the world's largest package delivery company have lagged the market since the start of 2006 thanks to higher fuel costs, continued competition with FedEx, and a slackening of U.S. business and consumer spending.

But as DHL's recent shipping deal with UPS indicates, the package shipping business is incredibly difficult to break into, even if you have relevant experience and resources (as DHL did). Point being that the entrenched players in this space, top-dog UPS and no. 2 FedEx both sport sizable economic moats that benefit from massive network effects.

Why UPS and not FedEx? UPS is considerably more profitable on a margin and absolute basis, achieves greater operating efficiency via its scale and prodigious logistics knowledge, and has significantly less overhang as it relates to workforce/union concerns. Speaking of potential overhangs, FedEx's fuel expenses as a percentage of revenue are close to twice that of UPS. While I ultimately don't think FedEx is a bad call at this point, I believe 2.6%-yielding UPS to be the safer play.

I don't expect shares of UPS to take off overnight, but given its strong balance sheet, fat cash flows, and a good bit of operating leverage, I expect shares to bounce back handsomely once the economy shows signs of turning the corner. Should be a market-beater over both the medium- and long-term.

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