It’s been a good year so far for United Parcel Service (NYSE:UPS) as the company’s shares have jumped more than 20%. A strong domestic delivery market in the U.S. combined with UPS’ expanding overseas presence are the reasons why investors are so optimistic about the stock. The international package division, which includes operations in Europe, Asia, Canada and Latin America, contributes about 28% to the stock price as per our estimates.
Europe makes up more than half of the company’s international segment revenues. The segment revenues grew by 10% y-o-y in 2011. However, a slowdown in emerging economies and unfavorable currency impacts resulted in a 1% decline in 2012. We are positive on the long-term growth prospects of the international operations primarily due to growth in global trade fueled by rising incomes in emerging markets. The fast-growing economies of Asia-Pacific and Latin America offer long-term, high-growth potential in domestic delivery markets. China’s GDP rose 7.4% while India’s grew by 5.5% last year. These are much higher compared to the expected GDP growth rate of 2.1% in the U.S. during the same period.
UPS recently announced that it is looking to acquire Chinese delivery companies with a regional presence to enhance its presence in shipping related to healthcare products. Not only will the move give the company an opportunity to have a stronger foothold of the Chinese domestic delivery market but medical transportation services offer fatter margins as well. Shipping medical devices and equipment often requires specialized handling and is the reason why shipping companies can charge a premium for such services. 
Foreign delivery companies have a limited presence in China. The nation‘s domestic shipping industry is dominated by state-owned companies such as China Postal Express & Logistics Co. Until last year, foreign express delivery companies were barred from delivering within the country but things have eased off a bit since then. Now, foreign companies have access to a limited number of cities within China. UPS, for example, is allowed to deliver in 19 cities across the country.
China’s domestic delivery market holds a huge potential. FedEx forecasts it to grow fivefold to $26 billion in 10 years starting 2011. The country’s burgeoning e-commerce market will drive growth of the delivery business.  China’s state-owned delivery companies also have reliability issues (such as items going missing or products getting damaged during delivery). Therefore, it’s not just the mushrooming market size that is lucrative but the opportunity to grab share from existing companies looks like a possibility.
Other Focus Areas
Due to better international presence in ground shipping and freight services, the company has an edge over its rivals such as FedEx. A continuing shift in freight traffic from air to sea driven by higher fuel prices is not helping the air cargo industry. However, UPS is less affected than FedEx since it has traditionally not relied significantly on express air services. A couple of months back, UPS even announced the expansion of its expedited ocean freight services to Western Europe.
The move is part of the company’s strategy to expand its preferred less-than-container load (PLCL) freight service that was started in 2011 to provide shippers with an intermediate option between the fast air freight and the economic standard ocean freight.
In a world where companies are aggressively cutting costs to improve profits due to muted or negative top-line growth in many sectors, an intermediate offering like the PLCL by UPS makes a lot of sense. Air express services are too expensive while the standard ocean freight shipments take weeks to reach customers. Overall, we feel that the company’s international operations look solid and should complement the domestic package delivery business in the long run.
We have a $ 86 price estimate for UPS, which is in line with the current market price.
- UPS Bulks Up in China, June 11, 2013, wsj.com [↩]
- FedEx, UPS Get a Toehold In China’s Express Delivery, September 10, 2012, wsj.com [↩]