Amazon is profitable for the post office, a former postmaster general says

Amazon Inc. is profitable for the U.S. Postal Service, former Postmaster General Patrick Donahoe “unequivocally stated” to UBS analysts, according to a Thursday note, contradicting tweets from President Donald Trump.

UBS analysts arranged a call with Donahoe due to the “confusion around the rhetoric coming out of Washington, D.C.” and in light of reports that the contract between Amazon and the U.S. Postal Service will expire in October.

Donahoe was appointed Postmaster General in October 2010 and served in that role until he retired on February 1, 2015, after a 39-year career at the service.

Donahoe said that Amazon’s business would fall under the “competitive products” category, which has rules guiding pricing.

“By law, competitive products must cover their costs, including both operating costs associated with the service provided (sorting, loading, etc.) and an allocation of 5.5% of the USPS’s institutional/fixed costs (which has a fairly broad definition),” UBS analysts led by Eric Sheridan wrote.

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Scrutiny of the 5.5% price allocation could raise package rates.

“The former Postmaster General indicated the impact to package volume from potential price increases is a major factor for the USPS as they consider potential price increases on their package products,” the note said.

Analysts are not expecting prices to jump higher.

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“That said, in a worst-case scenario based on 40%-50% of Amazon’s U.S. volume going to the USPS and prices increasing 5%-25%, we think the downside risk to our estimated 2019 GAAP operating income from USPS price increases is 11%-16% (or $1.2 billion to $1.7 billion),” analysts wrote. “Given Amazon is ~25% of USPS competitive products revenue, we think this level of increase is unlikely.”

UBS said the Postal Service has had to be mindful of overall declines in mail volumes when considering any change in pricing. The Postal Select service, which is a “last mile” service that’s “attractive” to e-commerce retailers, has grown at a faster pace compared with volume growth at United Parcel Service Inc. and FedEx Corp. the note said.

But the Postmaster General said the U.S. Postal Service would have to be mindful of potential share loss to competitors if price increases were too steep.

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UBS rates Amazon stock a buy with a $1,760 price target. FedEx is rated a buy with a $302 price target. And UPS is rated at neutral with a price target of $129.

Trump has used his Twitter account over the past week to post attacks on Amazon, the company’s Chief Executive Jeff Bezos and the Washington Post, another Bezos business. In a Thursday morning tweet, Trump once again went after the “Fake News Washington Post,” calling it “Amazon’s ‘chief lobbyist’.”

Amazon’s shares have taken a beating over the past week, but are up 2.5% in Thursday trading. Amazon shares are up 59% for the past year while the S&P 500 index is up 13% for the period and the Dow Jones Industrial Average  has gained 19%.