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Investment Overview for UPS (NYSE:UPS)
Below are key drivers of UPS that present opportunities for upside or downside to the current Trefis price estimate.
US Domestic Ground Package
- Domestic Ground Package EBITDA Margin: As the world’s crude oil production reaches maximum levels and declines in the coming years, the amount of aviation fuel produced will also decline over time. Domestic Ground EBITDA Margins have historically stayed around the 18% mark. We expect margins to increase to 20.3% by the end of the Trefis forecast period in 2021. If fuel costs increase by more than expected, and our margins decrease by 1.5% reaching 18.5% at the end of the Trefis forecast period, there could be a potential 5% downside to the Trefis price estimate of UPS' stock.
International Export Package
- International Export Package EBITDA Margin: As the world’s crude oil production reaches maximum levels and declines in the coming years, the amount of aviation fuel produced will also decline over time. International Export Package EBITDA Margins increased from 17.2% in 2008 to 22.3% in 2010 because of a decrease in fuel prices. The margins decreased to 20.6% in 2012 and 18.7% in 2013. We expect the International Export Package EBITDA Margins to decline in the near future and thereafter gradually revert back to historical levels by the end of the Trefis forecast period. However, if fuel costs increase by more than expected and margins stay at current levels, there could be a potential 5% downside to the Trefis price estimate of UPS stock.
United Parcel Service, Inc. ("UPS") is the world's largest package delivery company, a leader in the U.S. less-than-truckload industry, and a global leader in supply chain management. It delivers packages each business day for 1.1 million shipping customers to 7.7 million consignees in over 220 countries and territories.
Its primary business is the delivery of packages and documents worldwide. The UPS service portfolio also includes global supply chain services and less-than-truckload transportation which is primarily in the United States. Other business units within this segment include Mail Boxes Etc. and UPS Capital.
UPS operates a ground fleet of approximately 101,000 vehicles which reaches all business and residential zip codes in the contiguous U.S. It also operate an air fleet of 523 aircraft's and is one of the largest airlines in the world. The firms primary air hub is in Louisville, Kentucky. Regional air hubs are located in Hartford, Connecticut; Ontario, California; Philadelphia, Pennsylvania; and Rockford, Illinois. Its largest international air hub is in Cologne, Germany, with other regional international hubs in Miami, Florida; Canada; Hong Kong; Singapore; Taiwan; and China.
The US Domestic Package is the most valuable to the company because of the following reasons.
Highest number of shipments for US Domestic Package division
The US Domestic package division delivers a greater number of packages than the International Package division or UPS Freight. The total number of packages transported by the US Domestic division is more than 6 times the number transported by the International Package division.
The primary reason behind the high volumes of the U.S. Domestic Package is the booming e-commerce industry. With the North American e-commerce market forecast to grow more than 30% per year through 2018, we believe UPS's US Domestic Package segment should continue to grow in the coming years. (Link)
Moderated GDP growth forecasts
Demand for shipping volume is closely correlated with the overall consumer demand and GDP growth of an economy. The IMF recently lowered its global GDP outlook by 0.3%, to 3.4%, for the year 2014 citing weak recovery from the poor first quarter performance due to inventory overhang and bad weather impact in the U.S., geopolitical turmoil in Russia and moderate demand in China. (Link) The global economy is set to grow in the second half of 2014 driven by correction in the U.S. market, as the inventory overhang clears out, and continued growth in the Euro region. High growth in Japan driven by the planned unwinding of fiscal stimulus will also aid in the growth in the global GDP in the second half of the year. Of the emerging markets, India is expected to show continued growth driven by positive post election sentiments. China's growth will slow down marginally, by 0.2%, due to limited and targeted policy measures to support activity in the second half of the year.
Growing U.S. e-commerce industry
Growing e-commerce industry has been driving volumes at UPS's U.S. Domestic Package segment. In 2013, e-commerce sales grew 17%, increasing its contribution to overall retail sales from 5.2% to 5.8%. (Link) This is because, not only is online shopping more convenient, but has also become more accessible due to the increase in smartphones and tablets and higher internet penetration. Many brick-and-mortar retailers have rolled out online shopping portals to cater to the growing online retail shopping customer base. Deals and discounts on online shopping also encourage customers to purchase via websites rather than traditional stores. UPS’ package volume is directly impacted by e-commerce sales since many online retailers, such as Amazon (NASDAQ:AMZN), employ UPS’ services in order to offer their customers timely and economical delivery of products. With the North American e-commerce market forecast to grow more than 30% per year through 2018, we believe UPS's US Domestic Package segment should continue to grow in the coming years. (Link)
Dimension based pricing
UPS's margins have been falling due to the growing number of light-weight yet bulky packages. Since these packages are priced on the basis of their weight, they generate lower revenues due to lesser packages carried per vehicle or aircraft. In order to realize better prices from such packages, UPS has decided to follow a dimension based pricing strategy which will result in a 30-50% increase in pricing of the light-weight yet bulky packages. This strategy, which will be effective from December 29, 2014, should help in improving margins.
Demand for cheaper shipping options and higher competition from sea-borne shipping
There has been a clear trend of customers shifting from premium services to slower or deferred products while seeking lower shipping expenses. The air freight carriers are accordingly facing higher market share competition with seaborne shipping that offers lower rates. These trends could continue through 2013.
Increased international trade in finished goods translates into more packages shipped longer distances. But the potential benefits of international trade for UPS are not limited to growth in the parcel carrier market. Many developed world businesses already purchase materials they use from abroad, and this practice which is known as global sourcing is on the rise.
For businesses, the downside of global sourcing is complex supply chains that present previously unknown risks. For businesses facing import/export regulations and international transportation logistics for the first time, the appeal of outsourcing supply chain management is obvious. UPS Supply Chain Solutions hopes to capitalize on a projected increase in the market for third party supply chain managers.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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