E-Commerce, Global Trade And Healthcare Shipments Will Help UPS Grow In 2014

UPS (NYSE:UPS) saw its revenues go up in Q3 2013 driven by increase in package volumes from online retail sales and healthcare shipments. We expect the growth to continue in the coming year complimented by increased trade from developing economies. At the beginning of the fourth quarter UPS announced the roll out of its new route optimization software that will help improve operational efficiency and reduce costs. In this article, we look at how these drivers will impact UPS in the coming year.

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E-commerce will drive sales in UPS’s Domestic package segment

UPS’s US Domestic package revenues were up 5% in Q3 2013 due to an increase of 2.3% in volumes. The volume growth was primarily driven by growth in retail e-commerce sales as more and more people choose to shop online. Not only is online shopping far more convenient, but has become more accessible due to increases in smartphones and tablets. 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.

Retailers tie-up with logistics operators like UPS to aid in the delivery of packages ordered online. UPS offers cost sensitive service, SurePost and time sensitive and feature rich service, My Choice to its retail e-commerce clients. E-commerce sales during the holiday season are expected to boost UPS’s Domestic package revenues in the fourth quarter of 2013. With the US retail e-commerce industry expected to grow 11% in 2014, ^[1] we can expect to see continued increase in package volumes for the segment next year.

UPS’s Supply chain & Freight segment will grow aided by growth in global medical devices market

UPS offers logistics solutions for the healthcare industry to transport medicines, medical devices and surgical supplies under a controlled environment. UPS’s expertise in handling temperature-sensitive shipments of medical devices and supplies enable it to charge a premium for its services such as UPS Temperature True.

Growth in the healthcare services helped offset declines in UPS’s Supply Chain & Freight segment revenues in the first nine months of 2013 because of reduced volumes in high-tech shipments. We can expect significant upside in the segment’s revenues if the global healthcare devices and pharmaceutical markets grow at 4.4% and 2.5% per year respectively as forecasted. ^[2] UPS has been investing heavily in expanding healthcare distribution capacity over the past three quarters.

Recovery in global trade driven by developing economies will boost UPS’s revenues

Global trade is expected to grow at 4.5% in 2014. As more and more companies look towards emerging markets for growth in their business, trade with developing economies is bound to increase. Developing economies (including the Commonwealth of Independent States) are expected to outpace developed economies in growth in imports and exports by almost double.  ^[3]

This will have a positive impact on UPS’s top line since UPS has an extensive global presence which enables it to provide logistical support to companies involved in trading across countries and continents.  UPS has also been investing in expanding capacity in developing economies. It recently announced two new distribution facilities in Chengdu and Shanghai which will help cater to shippers who want to deliver to China. ^[4] UPS also announced the acquisition of two small Costa Rica based logistics companies to expand its presence in Latin America. ^[5]

ORION will help increase operational efficiency and reduce fuel expenses

UPS recently rolled out its route optimization software ORION (On-Road Integrated Optimization and Navigation) which will help reduce fuel costs, miles driven and air pollution by suggesting the most efficient route for delivery. It will help save $50 million annually for every mile reduced per day per driver. By the end of this year, routes implemented with ORION will reduce fuel consumption by 1.5 million gallons and carbon dioxide emissions by 14000 metric tonnes. ORION is expected to be deployed across all 55,000 of UPS’s routes in US by 2017, followed by global deployment. ^[6]

Understand What Drives a Stock at Trefis

1. US Online Retail Sales To Reach $370 Billion By 2017, March 13, 2013, www.mashable.com [↩]
2. Analysts: Device market growth will outpace pharma by 2018, October 3 2012, www.fiercemedicaldevices.com [↩]
3. WTO sees gradual recovery in coming months despite cut in trade forecasts, September 19 2013, www.wto.org [↩]
4. UPS Expands Logistics Reach to Meet Emerging Demand in China, August 13 2013, www.ups.com [↩]
5. UPS to Purchase Two Costa Rican Companies Boosts Customer Access to Global Markets, September 4 2013, www.ups.com [↩]
6. UPS Speeds ORION Deployment And Takes Routing Optimization To New Heights, October 30 2013, www.ups.com [↩]