The U.S. Postal Service Follows The Paper With Amazon.com

Nov.17.13 | About: Amazon.com, Inc. (AMZN)

When I wrote "International Paper Continues Business Adjustment As Accelerating Digitization Forces Mill Closure" almost two months ago, I suggested the following (emphasis mine):

"The Rome News-Tribune, a publication in Rome, Georgia, interviewed Thomas Ryan, director of communication for International Paper in Memphis, TN on the closure. Miller notes that while digitization is hurting the uncoated freesheet business it is helping the linerboard business (the Post Office would of course do well to get more competitive in the shipping business)"

Who knew? It turns out the Post Office is already following the paper and getting more competitive as it recently signed a shipping deal with Amazon.com (NASDAQ:AMZN):

"Amazon.com, Inc…is working with the U.S. Postal Service to deliver packages on Sunday, starting in the Los Angeles and New York metropolitan areas. Amazon Prime members, who receive unlimited, free two-day shipping on millions of items, can now receive their packages on Sunday in these areas. Amazon and the U.S. Postal Service plan to roll out this service to a large portion of the U.S. population in 2014 including Dallas, Houston, New Orleans and Phoenix, to name a few."

This deal with AMZN adds to what is one of the few bright spots for the Postal Service. Four days after the AMZN announcement, the Postal Service reported its financial results for the 2013 fiscal year (ending in September). Package volume increased by 6% or 210 million pieces, delivering revenue growth of 8% or $923M. Shipping and packaging services increased to $12.5B and is now 19% of the Postal Service's revenue. Standard mail revenue only grew by 3%, and First Class Mail, the Postal Service's most profitable business, continues to shrink and is a large drag on financial results. So while the Postal Service grew operational revenue for the first time since 2008, it still lost $6B for the year, its sixth straight year of losses. As its financial health continues to decline, the Postal Service made yet another plea to Congress for operational flexibility. Of course, these pleas are coming at the worst time possible given the political logjam in the Federal government.

The financial terms of the deal with AMZN were not provided, but clearly this deal will not be enough to bring postal operations into the black unless it somehow generates massive growth in package volume. Thus the Sunday option for delivery is the most intriguing part of the deal. In Multi-Channel Merchant, author Tim Parry posits that this deal opens the possibility of Sunday delivery from more merchants. This option is a clear win for consumers who get more choice and more options for getting packages delivered when they are home to receive them. Amazon Locker is one option for removing the risk of packages left on doorsteps, but it is not clear how long retailers will host a direct competitor on their floor space. In September, RadioShack (RSH) and Staples (NASDAQ:SPLS) closed down their Amazon Locker programs. Presumably, they did not get the supplemental sales they had hoped for as customers walk through the store to and from the Lockers.

In MarketWatch, author Catey Hill complains that this deal is yet one more encroachment on the traditional day of rest. However, with the Postal Service eliminating 12 million hours of work (a 1.1% reduction), I am guessing there are numerous Postal Workers who are happy to get this additional opportunity to work. Moreover, it is my understanding from talking to a postal worker that the Post Office has contracts with temporary employees who provide flexible staffing options for these kinds of extra shifts. Besides, unless the Sunday expansion causes workers to work additional days (not likely), the plan will not eliminate time to rest at some point in the week.

Amazon's stock has traded favorably since it announced the deal with the Postal Service. The stock has fully recovered from what had started to look like an imminent fill of the gap up from October's earnings. The last two days the stock has closed at fresh all-time highs. For those following the AMZN post-earnings play note that AMZN has yet again caused whiplash to the model of buying the open and holding for two weeks and/or shorting the stock after a close below the low of the first post-earnings trading day. I was ready this time though and treated the large drop one day before the two-week mark as a buying opportunity. The strong trading in the following week validated my change in strategy. I hope to soon formalize a new trading strategy which will basically leverage the overall uptrend that persists in the stock.

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More all-time highs for Amazon.com

Source: FreeStockCharts.com

Be careful out there!

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.