Package delivery and global supply chain management company UPS (NYSE:UPS) will report its first quarter earnings this Thursday, Apr 26. The company has been reporting consistent revenue upside and the trend is expected to continue in this quarter as well. Riding on strong cash flow projections in 2012, the company also announced an increase in dividend by ~10% to $0.57/share in February this year. The company has also been pursuing expansion strategies in Europe and Asia.
This quarter saw an acquisition of platform developer Kiala S.A. to broaden UPS’ B2C (Business to Customer) service portfolio. Another recent landmark was the agreement to purchase European shipping company TNT Express (FRA:2TN) at €9.50/share. However, the world’s largest package delivery company faces competition from FedEx (NYSE:FDX) which is also keenly exploring growth opportunities in European region.
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Eurozone Expansion Presents Tremendous Growth Opportunities
Despite challenging macroeconomic conditions prevailing in the Eurozone countries, UPS is still bullish on growth prospects in these markets. Through the acquisition of Kaila, UPS will leverage its platform that enables e-commerce retailers to offer their shoppers the option of having goods delivered to a convenient retail location.
Another milestone achieved by UPS is the announcement to acquire TNT Express. The completion of TNT’s acquisition Q3 2012 will create a massive entity with revenues of over $60 billion. The addition of TNT will enhance UPS’ product capabilities in Europe and Middle East road freight. This deal would also mean that non-US revenues form a considerable portion of the company’s total revenues. UPS expects annual cost synergies of €400-€550 million as the deal comes through. It will be interesting to know more details about this deal during this earnings release and their impact on the operating cash flows in the near term.
Capital Expenditure to Support Growth Strategy
In order to align its growth strategies in European and Asian markets, UPS expects to increase capital spending this year. The expansion program includes $200 million investment at the European air hub in Cologne, Germany in the next two years. The company also intends to increase its fleet size through purchase of 15 Boeing 767-300ER freighters by 2013. Though these investments may impact the bottom-line in the near term, they will act as a catalyst for future growth.
We have a $83.60 Trefis price estimate for UPS, which is about 5% ahead of the current market price. We are revisiting this in order to incorporate the trends witnessed during the past quarter.