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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 stay at the current levels till the end of the Trefis forecast period. However, if oil prices decline in 2013 and our margins increase by 0.5% over the next four years, reaching 18.2% by the end of the Trefis forecast period, there could be a 5% increase in the Trefis price estimate of the company's stock price. On the other hand, if fuel costs increase by more than expected, and our margins decrease by 0.5% in the next four years, reaching 17.2% 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 20.0% in 2011 but improved to 20.8% in 2012. We expect the International Export Package EBITDA Margins to stay at that point till the end of the Trefis forecast period. However, if oil prices decline considerably in 2013 and our margins increase by 2.5% over the next 3 years reaching 22% by the end of the Trefis forecast period, there could be a 5% increase in the Trefis price estimate of the company's stock. On the other hand, 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.
Moderated GDP growth forecasts
Demand for shipping volume is closely correlated with the overall consumer demand and GDP growth of an economy. The US economy is expected to grow about 2.5% in 2013 and 2014 respectively. Post Q2, UPS revised its earnings guidance citing continued macro uncertainty in the U.S., growing weakness in Asian exports, the sovereign debt crisis in Europe and pessimism among customers. UPS expects that the U.S. GDP growth might slow down to 2% this year, much lower than its previous expectations as consumer spending and retail sales have continued to slow down and unemployment rates still remained critical.
In Q2 2013, UPS's domestic revenue could only increase 1.2% over the prior-year period, driven by the U.S. domestic package. However, the volume growth was more inclined towards cheaper and deferred packages like the deferred air segment. This was in-line with the recent trend of customers shifting from premium services to slower or deferred products and sea-borne shipping while seeking lower expenses.
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.
As part of its non-US expansion, UPS acquired TNT in March 2012, which adds scale to the organization. It also acquired Belgian B2B delivery company Kiala in February 2012. This is contrast with its chief rival FedEx that has preferred small scale acquisitions with revenues in the order of millions such as French B2B express transportation company, TATEX and Polish courier company, Opek.
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.
Absorbing loss during fuel price increase
Fuel surcharges, which pass fuel costs on to customers, are standard practices in the transportation business. UPS calculates surcharges for a given period based on fuel prices six weeks earlier, absorbing some losses when prices increase sharply but making a profit on surcharges when prices fall. There is little reason to expect that this practice will change in the near future despite the threat of increasing prices.
UPS is a barometer of the U.S economy
UPS' profits are highly cyclical as they depend on the strength of the U.S. and world economies because economic health is a key determinant of package volumes. Package volumes and economic strength are so tightly correlated that economists will study package volume data from companies like UPS as an indicator of whether economic activity is slowing or heating up.
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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