UPS: 2016 In Review

Logistics giant UPS (NYSE:UPS) continued its strong performance in 2016, driven by strong e-commerce growth. In the first nine months of the last year, the company’s top line improved a moderate 4% on year-over-year (y-o-y) basis, primarily driven by higher shipment volumes across all product categories. This revenue growth trickled down to the company’s bottom line as well, which rose 4.5% in the same period. The company’s net income per share (EPS) increased 6% year-over-year (y-o-y) to $4.15. Moreover, the company did not miss analyst estimates for EPS in any of the three quarters. The strong performance in all the three quarters resulted in the surge in the company’s stock price which is currently trading at 20% higher than its price in January 2016.

Consumer Spending Drives Growth

Online purchases continue to drive demand for UPS’s services, with both U.S. Domestic Package and International Packages performing well in the first nine months of the year. U.S. Domestic Package revenues witnessed growth of 3.4% on a y-o-y basis to $27.4 billion, primarily driven by a 3.7% rise in average daily volumes. Within the segment, all the three divisions – Next Day, Ground and Deferred – witnessed an increase in average daily shipments.

Despite uncertainty in the global economy, UPS’s International Package segment witnessed a marginal uptick in its revenues. In the first nine months, the division’s revenues of $9 billion were 0.5% higher than the prior year period. This was primarily due to a 3% surge in daily package volume, partially offset by a 2% decrease in average revenue per piece. Moreover, UPS’s efforts to streamline its international operations started to pay dividends, with the division’s operating income and operating profits witnessing significant growth. In the first nine months, the division’s operating income rose 13% y-o-y to $1.76 billion while the operating margin increased 220 basis points. This was primarily due to lower fuel prices, better sorting facilities and favorable currency exchange rates.

Higher Capital Spending 

In the first three quarters, UPS’s free cash flow decreased 23% y-o-y to $3.5 billion. This was primarily due to lower cash from operating activities and higher capital expenditures. The company’s cash from operating activities declined 16% over the same period last year, primarily due to higher pension and post retirement benefit contributions, partially offset by higher net income. Additionally, the company’s capital expenditures increased 11% over the prior year quarter to $1.8 billion. Capex as a percentage of revenue also increased 30 basis points to 4.2% in the first nine months of the year. The rise in the company’s capital expenditures was a result of opening new facilities and upgrading existing facilities in California, Colorado, Illinois and Texas.

By 2019, UPS plans to sort 50% of its total ground volume through automation, which would not only improve productivity but also reduce costs. Additionally, the company took measures to upgrade its facilities in Europe, in order to tackle the renewed competitive challenge from the combined FedEx-TNT entity. The company intends to spend $2 billion on upgrading its existing facilities in Europe.

Marken Acquisition

In November, UPS announced its plans strengthen its healthcare offerings by acquiring Marken, a U.K.-based supply chain provider to the life sciences industry. The company’s management has consistently stated the importance of the healthcare sector to its top line, and has made efforts to strengthen its offerings for the sector. The latest acquisition, completed in December, is a step to consolidate its offerings for this sector.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research