United Parcel Services (NYSE: UPS) is the largest package delivery company listed on the NYSE. From its base in Atlanta, UPS operates in three distinct market segments: – package delivery within the US domestic market, supply chain and freight operations, and international package delivery. Internationally UPS operates in over 220 countries worldwide, both to and from the USA as well as to and from countries outside the US.
With a market capitalization of approximately $72billion, UPS nearest listed competitor in the US is FedEx (NYSE:FDX) with a capitalization of approximately 29 billion dollars. Other comparable global competitors in this space are TNT Express (NYSE Euronext Amsterdam: TNTE) with a market capitalization of 3.5 billion Euros, or $4.5billion, and various unlisted companies such as the United States Postal Service, Deutsche Post AG and Japan Post Holding Co.
The UPS stock price has fully recovered to levels seen before the 2008 financial crash. In January 2008 the stock price was approximately 68 dollars. On January 20th 2012 it is approximately 75 dollars, having dropped to 39 dollars during March 2009. Notwithstanding this drop however, the company continued to pay out generous dividends to shareholders: 45c per quarter in 2008 and 2009, rising to 47c per quarter in 2010 and 52c per quarter in 2011.
On October 25 2011 UPS had an investor conference call to discuss the third quarter results (http://seekingalpha.com/article/301938-united-parcel-service-s-ceo-discusses-q3-2011-results-earnings-call-transcript). As reported by Kurt Kuehn, the CFO, increased dividends by 11% and also bought back shares worth 2.2 billion dollars, thereby enhancing shareholder earnings.
Kurt Kuehn and Scott Davis, the CEO, were cautious in their predictions. While UPS had ridden out the worst of the 2008 crisis, the current financial crisis emanating from Europe and Asia still had to be resolved. The litmus test for the immediate future would be the increase over December – the holiday period.
The CFO reported that the domestic market appeared to be growing nicely, with operating margin increasing to 13.1%, an increase of 60 basis points. This is the highest profit margin in the last 3 years. Furthermore advances in technology led to operating profit growth above 11%.
The USA – Asia market profit margin declined during the 3rd quarter. However it came after a large increase – over 47% – the previous year. UPS were unable to react quickly enough to match resources to the downturn so were left with overcapacity. This market is now being more actively monitored.
Despite this slowdown, UPS international revenues jumped 14% driven by solid growth in other areas, including US exports. To further enhance growth in these areas, UPS Worldship country of origin is being expanded to another 25 countries, bringing the total to 26.
The Supply Chain and Freight division also performed well during this quarter. Revenue was up over 5% from the previous year to 2.3 billion dollars. This lead to an operating profit of 195 million dollars, with operating margin increasing to 8.3%
UPS achieved these gains while increasing their free cash flow. Even after capital expenditure of $1.6 billion, and paying pension benefits of $1.4 billion, UPS generated free cash flow of more than $3.7 billion during the first three quarters of the year.
During the conference call Scott Davis also reported a number of initiatives to ensure UPS could grow as the world economy once again picked up steam. They rolled out UPS My Choice, giving consumers increased flexibility in delivery options, while lowering costs by eliminating multiple delivery attempts. Over 100,000 customers have subscribed to the service.
UPS also announced a $200 million expansion of the Cologne air hub, which includes state-of-the-art UPS technology and will boost capacity by more than 70%.
UPS P/E ratio of 18.22 is above the current Dow industrial average of 13.73 or the Dow utility of 14.69. It is however cheaper than the Dow transport average of 21.72, which is a good proxy for this share. The dividend yield of 2.76% is however higher than the transportation average of 1.50% and the industrial average of 2.52. The utility average is however higher at 3.99% (http://online.wsj.com/mdc/public/page/2_3021-peyield.html)
On 1th January UPS was downgraded by, inter alia, J P Morgan from buy to hold, retaining the target price of $82.( http://galaxystocks.com/18648/business-news/united-parcel-service-suffers-a-rating-drop-from-jpmorgan-citing-multiple-headwinds-nyseups/) This was in response to the global downturn as mentioned earlier, as well as increased costs. The share price at the time was $73.19, and notwithstanding this downgrade was at $75.38 on January 20.
The investment case for UPS depends on your view of the global economy. With steady gains in the US domestic market, and positive free cash flow in 2011, a resolution of the European crisis should restore confidence in the world’s economies. Furthermore although there has been gloom over slowing of growth in China, their GDP growth has dropped to 8.9% – still a formidable number. Should this remain as Europe returns to normality then the world economy should be back on an upward trajectory, and the requirement for worldwide package delivery should grow.