FedEx Lands $10.5Bn Postal Service Deal

Federal Express Corporation (FEDEX) has won a contract with the U.S. Postal Service valued at about $10 billion to carry mail between U.S. airports, fending off a challenge from United Parcel Service Inc. (UPS)

The new contract accords Fedex opportunity to fly Express Mail and Priority Mail commencing in October once the current deal ends, FedEx said  in a statement.

Although the company did not give details beyond the value and length of the agreement, it said that contract locks in FedEx’s business with the Postal Service and erases concern that it would lose some work to UPS as the U.S. mail carrier restructures after years of losses.

FedEx has a larger U.S. air network and already has the labor and assets to handle Postal Service volume, most of which is processed during the day after the company’s premium overnight packages and documents have been cleared.

This contract win is a sorely needed shot in the arm for FedEx,” Justin Yagerman, an analyst at Deutsche Bank in New York, wrote today in a note. He recommends buying the stock, and said it probably will rally today on the news.

Bloomberg.net reported that FedEx rose 1.6 percent to $94.66 at 9:31 a.m. in New York. Atlanta-based UPS fell 0.1 percent to $83.65.

Bloomberg.net quoted analysts such as Kelly Dougherty of Macquarie Capital Inc. in New York said FedEx investors were worried that UPS might have taken away as much as 30 percent of the postal business.

FedEx described its bid as “competitive,” which Dougherty said is a signal that it has lower profit margins than the current contract. Dougherty rates FedEx outperform.

Some analysts trimmed their earnings estimates for FedEx. Art Hatfield, of Raymond James in Memphis, lowered his estimates for fiscal 2014 by 15 cents a share, to $7.35, and for fiscal 2015 by 20 cents, to $8.60.