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Published: June 22, 2010
In the hunt for stocks, equity investors often turn to
mechanical things like screeners to help guide them. They set
various criteria such as earnings growth or market cap and
blindly follow the answers that get spit out. There's nothing
wrong with this approach, but it may discount the possibility of
the most important criteria any investor should look for first
-- whether or not a company is a
monopoly or part of an
oligopoly.
Investors cannot overlook the value of an oligopoly. With little
competition to fight off, these companies have above-average
chances for strong returns over the long term.
Think about it -- when you want to send a package, what services
immediately leap to mind? I can think of four: The Post Office,
FedEx (NYSE: FDX), UPS (NYSE: UPS), and DHL
Express. As far as international carriers go, and certainly with
domestic ones, that's all there is as far as holding significant
market share.
The competition that does exist is essentially a
commodity, and customers will really only examine three
things when deciding which carrier to choose: price, service,
and reliability. Prices vary wildly depending on the size and
weight of the package, distance to travel and level of haste
desired. I know from personal experience that I always check all
four services for price. When it comes to service, however, the
price has to be a tremendous bargain for me to set foot in the
post office, with its understaffed counters and long lines. Time
is money to everyone, after all. That's probably the reason why
the Post Office is losing money hand over fist.
When it comes to picking between these companies for an
investment, my favorite is UPS. One thing UPS has going for it
is a
global brand name, and that power must never be
underestimated. The company came to the marketing game later
than FedEx, so it's had to play catch up. But UPS' signature
ubiquitous brown trucks and "What Can Brown Do For You?"
campaign have helped the company surge, along with the
then-largest
IPO ever in 1999, which significantly raised its profile.
Companies in the transportation business
have challenges that most others don't. Gas prices are much
higher today than they used to be, and even though UPS might
pass on some of those costs, they still need to conserve.
There's also the consideration of delivering items quickly.
Believe it or not, things like this get covered in training for
UPS drivers. The training literally includes planning out
drivers' routes so as to make more right turns (waiting for left
turns wastes gas), carrying keys on their ring finger (so as to
more efficiently start the truck), and walking quickly. Truth be
told, that right turn gimmick saves 30 million miles of travel.
The economy has hurt delivery services, but UPS still made $3
billion in 2008 and $2.1 billion in 2009. That's where being an
oligopoly comes in handy. The company carries $7 billion in very
cheap debt (at about 6.5% interest), and easily meets its $445
million debt service payments with earnings.
Free cash flow was downright explosive in 2008 and 2009:
$5.8 billion and $3.9 billion, respectively.
Action To Take --> UPS
remains a growth story, even after 102 years in the business.
And once the global economy recovers, the company should fire on
all cylinders. Analysts expect UPS to roar back, projecting a
+40% earnings increase in 2010, +22% in 2011 and +14% annually
during the next five years. It's a big buy.
-- Frederick Steier
Contributor
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