Will UPS’s Gains From E-Commerce Offset A Weak Economy?

by Trefis Team
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United Parcel Service (NYSE:UPS) will announce fourth quarter earnings on Thursday, January 31. The company’s revenues grew 2% y-o-y but earnings declined 15% y-o-y in the first three quarters of 2012. Earnings were impacted by a one-time pension restructuring charge of $896 million in the third quarter. [1]

In the fourth quarter, the growth in e-commerce will continue to strengthen the business-to-consumer shipping segment and support UPS’ earnings. On the other hand, an uncertain global economic environment which is forcing customers to opt for ground-based and deferred shipping services over premium air-based shipping services will negatively impact the company.

We currently have a stock price estimate of $78.44 for UPS, approximately 5% below its current market price.

See our complete analysis of UPS here

Growth in e-commerce

In the fourth quarter, the continued growth in retail sales, particularly retail e-commerce sales, supported growth in package delivery markets in the U.S. and several other countries. Holiday shopping also helped growth. In the weeks between Thanksgiving and Christmas, retail sales were expected to grow by 4% y-o-y to $586 billion, according to the National Retail Federation, and online sales excluding travel were expected to grow 17% y-o-y to $55 billion, according to eMarketer. [2] [3] Accordingly, UPS projected its holiday season package deliveries to grow 10% y-o-y to 527 million. [4] This will contribute to revenues and earnings growth in the fourth quarter.

However, the business-to-business package delivery segment will likely continue to remain suppressed due to low economic growth in several parts of the world.

Growth in intra-regional trade

Additionally, due to uneven economic growth internationally, trans-continental trade and particularly exports from the U.S. to Europe was impacted in the fourth quarter. However, intra-regional trade, especially trade within Asia, continued to remain strong driven by greater regional sourcing by businesses. In all, mixed trends in international trade will also exert their impact on UPS’ earnings in the fourth quarter.

Weak global economy

On the flip side, global economic headwinds continued to put pressure on shipping rates in Q4. Economic uncertainty also caused customers to shift to lower-priced ground-based and deferred shipping over higher-priced express shipping. This trade-off by customers in favor of lower prices will negatively impact UPS’s average revenue per package in Q4. This trend was also witnessed in the first three quarters of 2012, during which average revenue per package for UPS declined 0.5% y-o-y to $10.96, and impacted its earnings. [1]

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Notes:
  1. 2012 Q3 10-Q, November 2 2012, www.ups.com [] []
  2. Record FedEx Holiday Volume to be Driven by E-Commerce, October 22 2012, www.fedex.com []
  3. 2012 retail sales, UPS’ 2012 holiday shipping season, www.ups.com []
  4. UPS My Choice Service Makes the Holiday Season Hassle-Free for Millions of Consumers, November 19 2012, www.ups.com []
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