UPS: Growth Momentum Could Continue Into The Second Half Of The Year

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UPS: United Parcel Service logo
UPS
United Parcel Service

United Parcel Service (NYSE:UPS) is ready to up their game this year. With new investments and acquisitions, UPS is looking to improve their delivery network and market share. Though revenue fell in the last quarter by 1.2% year-on-year, the bottom line showed great promise, with an EPS of $1.35, beating analyst estimates of $1.26 by a margin of about 7%. [1] This trend is likely to continue for the remainder of the year. Here’s why:

Acquisition Of Coyote Logistics:

Ever since the holiday season mishap of 2013, where UPS could not cope with the demand due to bad weather and a large influx of e-commerce orders, the company has been trying to make its supply chain better. It has invested heavily in technology and capital ever since to achieve this goal. In keeping with this strategy, UPS has recently acquired Coyote Logistics for $1.8 billion to help increase delivery rate and efficiency. The Chicago-based company aims to provide short-term trucking solutions to shipping companies, utilizing its network of 35,000 pre-qualified local, regional, and national carriers.

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Additionally, Coyote has a very good market position with various types of customers, from a range of industries, including paper and retail. In the past, Coyote has also created software for UPS to help it cope with the holiday season demand. Better technology brought in by this acquisition will help improve fleet utilization, which, in turn, could improve the bottom line by adding an estimated $150 million in terms of revenue and savings in the coming year, according to UPS [2].

Other acquisitions of 2015 – Integrated Parcel Service and Parcel Pro – could also give UPS a much needed edge in a crowded market.

EPS for FY14 for UPS was $4.75, significantly below the guidance range of $4.90-$5.00 for reasons pertaining to increased investments to improve operations. [3] However, this year, the management is quite confident that EPS growth could range between 6-12% [4].

Outperforming In International Segments:

The highest revenues earned in Q2 were from UPS’s International Package segment followed by the Freight and Supply Chain segment. On a constant currency basis, the company’s international operations grew by 1.5% year-on-year. However, negative foreign currency movements adversely affected gains, resulting in a 6.4% fall in revenues.

Earlier this year in April, UPS had announced plans of increasing investments to the tune of $1.06 billion in Europe to better compete with the FedEx-TNT threat (after UPS’s deal with TNT fell through). The company decided to add about 1,400 new trucks to expand its operations. It also purchased 319 CNG fuel systems from Quantum Fuel System Technologies. This technology is anticipated to help reduce fuel costs significantly. UPS is going to open 15 new CNG fueling stations, to provide more support to its expansion plans [5]. These investments, alongside positive growth forecasts for the EU – due to increased exports and consumer spending – could lead to higher margins from the European market in the upcoming quarters.

The recent slow-down in China had some investors concerned due to UPS’s exposure to Chinese import-export. According to the UPS President, James Jay Barber Jr., business in China was up 5-6% in Q2, as they continue to focus on the middle market. He seemed confident that despite China’s move to a more domestic GDP consumption, business will continue to grow, primarily due to the import-export and Supply Chain and Forwarding segments, which show great promise. However, the economic conditions in China have since deteriorated further, with the country devaluing the renminbi and cutting interest rates. Therefore, despite the positive outlook given previously, the business in China could face headwinds. Nonetheless, UPS is maintaining a positive outlook in the international segment for FY15, as business in Europe, which accounts for a large percentage, is on an upward trend.

So as we can see, UPS could end up with strong numbers at the end of this financial year. Even the anticipated climb in oil prices could help push the bottom line up, due to increased fuel surcharge revenue. However, all of these efforts could prove to be pointless, if the company cannot reach an agreement with its pilots, following a prolonged, four year negotiation regarding their contracts. The Independent Pilots Association (IPA) has urged them to go on strike. This matter will be put to a vote, the results of which will be declared on October 23, later this year [6]. If the strike happens, it could significantly hurt UPS’s revenues – especially around the holiday season.

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Notes:
  1. UPS’s Q2 2015 earnings, ups.com []
  2. UPS to buy Coyote Logistics, bloomberg.com []
  3. UPS’s 10K report FY14, nasdaqomx.mobular.net []
  4. UPS announces guidance for FY15, ups.com []
  5. UPS to Invest $1.06 Billion in Europe, bidnessetc.com []
  6. UPS pilots (IPA) call strike vote, postandparcel.info []