In an economic slow-down or recession, demand for courier companies’ services weakens, driving corporate profits — and stock prices — lower. But as markets anticipate these events, soft stock prices could present some buying opportunities.

Likewise, companies involved in freight forwarding — they arrange for goods transportation but don’t provide it — could represent investment opportunities in the current environment.

Demand for package and freight transportation is especially sensitive to economic conditions. But while demand may go down, the cost of doing business does not. As with most transportation-related companies, couriers face high fixed costs in terms of equipment and staffing for most of their activities.

Another consideration is fuel costs, particularly for U.S.-based companies, as oil is priced in U.S. dollars. (Conversely, the rise of the euro and the yen in recent years has lowered fuel costs for European and Japanese companies.)

The two biggest courier companies are Atlanta-based United Parcel Service Inc. , which reported revenue of $49.7 billion in the fiscal year ended Dec. 31, 2007, and Memphis, Tenn.-based FedEx Corp. , which had revenue of $18.6 billion in the six months ended Nov. 30, 2007. (All dollar figures are in US$.)

Both companies do a large part of their business in the U.S., which makes a number of money managers nervous, among them Patricia Fee, money manager at I.G. International Management Ltd. in Dublin: “We don’t know the depth or length of the slowdown/recession in the U.S.”

Other money managers, however, see some upside potential, particularly for FedEx. Although they consider UPS a very high-quality firm, they are shying away from its stock at current price levels. FedEx’s stock price, on the other hand, has come down more than UPS’s, making it more attractive, even though the courier faces a number of issues that concern investors.

Some money managers see freight forwarders as a good defensive position in the current environment. But Fee and others believe they are more vulnerable than their current stock prices suggest.

Two of the freight forwarders recommended are Seattle-based Expeditors International of Washington Inc. and C.H. Robinson Worldwide Inc. of Eden Prairie, Minn.

Here’s a look at these two courier companies and these two freight forwarders in greater detail:



THE COURIERS

> Fedex Corp. Over the past five years, this courier company has been taking market share from UPS, but further gains will be difficult to achieve.

A report from UBS Securities LLC in New York issued on Nov. 19, 2007, states that FedEx is preferable to UPS because of FedEx’s “premier franchise and brand, global footprint and ground market share story.” The report considers the stock dirt cheap at $96.80 a share, and it has since fallen to below $90 a share. The UBS report’s 12-month price target for FedEx is $130 a share.

However, the UBS report does warn that those looking for gains within the next six months and those who think the U.S. will go into a recession should avoid the company for now.

A report from New York-based Argus Research Co. issued on Dec. 20, 2007, also rates the stock a “buy,” with a 12-month target price of $120 a share. While the Argus report admits that FedEx’s recent financial results reflect pressures from high fuel costs and economic weakness in the U.S., the Argus report “continues to see long-term strength for FedEx as it expands its global network with new service offerings in China, Europe and North America.”

A recent report from New York-based J.P. Morgan Securities Inc. recommends overweighting FedEx within the air-freight and surface transportation markets, calling it “an attractive long-term growth story.” The report calls the current stock price “an attractive entry point.” It does not, however, see a likely catalyst for an uptrend in the short term.

Joe D’Angelo, portfolio manager at Signature Advisors, a unit of CI Investments Inc. in Toronto, likes FedEx’s approach and agrees that the stock has become “very cheap.” However, he says, FedEx faces more challenges than UPS. It has more air traffic, the most expensive form of transportation, which tends to decrease more than ground transportation when the economy weakens.

In addition, FedEx’s drivers are fighting to be considered employees rather than independent contractors. If they succeed, that would push costs substantially higher. D’Angelo thinks this is unlikely. But Fee also notes this risk: it may take years to resolve, she says, and will hang over the stock in the interim. She also says there is a cost to the company’s efforts to convert drivers from single routes to multiple routes, for which compensation is higher.

@page_break@FedEx reported net income of $973 million in the six months ended Nov. 30, 2007, down slightly from $986 million in the same period a year earlier. Six-month revenue was $18.6 million vs $17.5 million. Long-term debt was $2 billion as of Nov. 30.

> United Parcel Service Inc. Argus’s Feb. 12 report on UPS rated the stock a “buy,” with a 12-month target price of $82 a share. The shares closed at $72.42 on Feb. 15.

Although a Jan. 17 Argus report admits that the current economic environment is challenging, it states that “the company’s recently announced capital plans are likely to provide more flexibility and boost earnings through share repurchase activity.” The report also notes that UPS had implemented an average 4.9% rate increase for 2008.

D’Angelo prefers UPS to FedEx; he believes UPS is almost finished losing market share to FedEx and there’s room for UPS to grow in the U.S.-Asia and U.S.-Europe markets. UPS has also been investing to improve sorting errors. D’Angelo notes that the company has the scale and size to invest about $1 billion a year in technology. UPS is also aggressively buying back its shares and plans to optimize its balance sheet by taking on more debt.

A recent J.P. Morgan report says the impact of economic weakness is priced into the stock and suggests overweighting it within the air-freight and surface transportation subsector. “Our sense is that the stock is likely to drift up,” the report says, “especially if incremental data points on the economy are positive.” But, it adds, “It is difficult to identify a near-term, company-specific catalyst.”

A Jan. 30 UBS report rates the stock “neutral” with a 12-month price target of $78 a share. Although the UBS report does not assume a U.S. recession — it is predicting economic growth of 1%-2% this year — and says the worst of the housing and auto subsectors’ downturn is past, the report’s authors are concerned about UPS’s exposure to the consumer, the wild card this year.

UPS reported net income of $447 million in 2007 vs $4.2 billion in 2006. This was after taking a $3.8-billion charge related to the company’s withdrawal from a pension plan. There were also pre-tax charges including a $221-million impairment charge due to acceleration of planned retirement of aircraft and engines; $68 million related to severance; and $46 million related to restructuring and disposal of certain operations in France.

Revenue was $49.7 million in 2007 vs $47.5 million in 2006. Long-term debt was $3.3 billion as of Sept. 30, 2007.



THE FREIGHT FORWARDERS

> C.H. Robinson Worldwide Inc. Although a UBS report issued on Jan. 30 rated C.H. Robinson a “buy,” the report warns that revenue growth is likely to decelerate and margins are likely to deteriorate. The report adds that the combination of these factors will slow earnings-per-share growth to less than the company’s long-term target of 15% or more.

“We are now more than one year into a freight recession,” the UBS report states. “A big pickup in the economy is unlikely and it’s becoming harder for C.H. Robinson to keep gross margins at the high end of the historical range.” The report estimates EPS growth of 11% in 2008, 14% in 2009 and 16% in 2010.

The UBS report has a 12-month price target of $64 a share, well above the $53.83 a share at which it closed on Feb. 15.

On the other hand, a Jan. 29 J.P. Morgan report states that C.H. Robinson is likely to “sustain gross revenue momentum in 2008 despite what is likely to remain a weak truck-load market.” The company gets about 80% of its revenue from purchasing truck capacity for customers.

This optimism is based on comments from management about the breadth of services and transportation alternatives that C.H. Robinson can sell, as well as its commitment to long-term carrier and customer relationships.

The J.P. Morgan report suggests overweighting the stock within the air-freight and surface transportation subsector, but doesn’t provide a price target.

Carlee Price, research analyst with Franklin Resources Inc. in San Mateo, Calif., also recommends C.H. Robinson. Although most of the company’s business is in the U.S., she notes, a lot of the goods it transports come from or are bound for overseas markets, which lowers the firm’s dependency on U.S. economic growth.

Price sees almost 30% upside potential for the stock price in the next 12 to 18 months. She considers C.H. Robinson well managed and notes that it buys back sufficient shares to keep the number of outstanding shares at a consistent level. In addition, the company makes small acquisitions to help itself grow.

C.H. Robinson reported net income in the fiscal year ended Dec. 31, 2007, of $324.3 million, up from $266.9 million in 2006. Revenue was $7.3 billion in 2007 vs $6.6 billion in 2006. The company had no long-term debt as of Dec. 31.

> Expeditors International Of Washington Inc. Even though Expeditors has the same business model as C.H. Robinson, Expeditors focuses on air freight, which accounted for $2.4 billion, or 46%, of its $5.2 billion in revenue in the fiscal year ended Dec. 31; ocean freight and services accounted for $1.8 billion, or 35%. The remaining $1 billion in revenue, or 19% of Expeditors’ business, comes from customs brokerages and other services.

Analyst Price is just as enthusiastic about Expeditors’ management and prospects as she is about C.H. Robinson’s. However, she believes the upside potential for Expeditors’ stock, which she puts in the 20%-25% range, is a little lower than for C.H. Robinson’s.

A Feb. 11 J.P. Morgan report reiterates its “overweighted” rating for Expeditors within the air-freight and surface transportation subsector. However, the report notes disappointment with Expeditors’ air-freight revenue in the fourth quarter of 2007. The report is still “anticipating meaningful 2008 EPS growth of around 18%.”

The thesis of the J.P. Morgan report is that the addition of strong ocean-container shipping in 2008 and a sharp rise in air-freight capacity in 2009-10 “should provide yield expansion opportunity for Expeditors, which should buffer the impact that weak economic trends could have had on the company’s top-line growth.”

However, a period of sustained economic weakness in the U.S. could create “a meaningful headwind, which could lower EPS growth,” the report warns. It also notes that “further redirection of container ship and air-freight capacity away from U.S. lanes is also a potential risk, which could hinder gross margin expansion for Expeditors in a slower-demand environment.”

A Feb. 12 report from UBS has trimmed EPS forecasts for Expeditors for 2008 and 2009 and cut the 12-month price target for the company to $46 a share from $53 a share. The stock closed at $41.36 a share on Feb. 15.

Although the UBS report agrees that Expeditors’ business model and execution are excellent, the report says investors have not yet factored in the fact that Expeditors is not completely recessionproof, pointing to consensus EPS growth forecasts of 22% for 2008: “The company is not completely immune to a global slowdown and — even with continued market share gains — is unlikely to post the 20%-plus EPS growth rates we saw between 2004 and 2005.”

UBS economists expect global growth of 3.6% in 2008 and 3.8% in 2009 vs about 4.5% in 2007.

Expeditors reported net income of $269.1 million in 2007 vs $235.1 million in 2006. Revenue in 2007 was $5.2 billion vs $4.6 billion in 2006. The company had no debt as of Dec. 31. IE