Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March 2020 helped the markets stage a strong recovery.
Further, with the increased vaccination rate for Covid-19, economies have opened up gradually, implying a pickup in demand for UPS' services. There has been an increase in e-commerce orders, boding well for UPS' ground shipments. In addition, the company posted solid results over the recent quarters, which aided its stock price.
However, fuel prices have seen a gradual increase over the last year or so, and EIA now estimates WTI Crude to average $99 a barrel in 2022, compared to $68 levels in 2021. While this will result in higher fuel expenses for UPS, it will also result in higher revenue from fuel surcharge.
Below are key drivers of UPS that present opportunities for upside or downside to the current Trefis price estimate.
United Parcel Service, Inc. ("UPS") is the world's largest package delivery company, a leader in the U.S. truckload industry, and a global leader in supply chain management. It delivers packages each business day from its 1990 locations worldwide to 10 million consignees in over 220 countries and territories.
Its primary business is the delivery of packages and documents worldwide. The UPS service portfolio also includes global supply chain services, and truckload transportation which is primarily in the U.S. Other business units within this segment include Mail Boxes Etc. and UPS Capital.
UPS operates a ground fleet of approximately 123,000 vehicles which reaches all business and residential zip codes in the contiguous U.S. It also operates an air fleet of 650 aircraft and is one of the largest airlines in the world. The firm's primary air hub is in Louisville, Kentucky. Regional air hubs are located in Hartford, Connecticut; Ontario, California; Philadelphia, Pennsylvania; and Rockford, Illinois. Its largest international air hub is in Cologne, Germany, with other regional international hubs in Miami, Florida; Ontario, Canada; Hong Kong; Singapore; Taiwan; and China.
The US Domestic Package is the most valuable to the company because of the following reasons.
The US Domestic package division delivers a greater number of packages than the International Package division or UPS Freight. The total number of packages transported by the US Domestic division is almost 6 times the number transported by the International Package division.
The primary reason behind the high volumes of the U.S. Domestic Package is the booming e-commerce industry. With the North American e-commerce market forecast to grow in double digits over the next few years, we believe UPS's US Domestic Package segment will continue to grow in the coming years.
The growing e-commerce industry has been driving volumes at UPS's U.S. Domestic Package segment. Not only is online shopping more convenient, but it has also become more accessible due to the increase in the number of smartphones and tablets available, supported by higher internet penetration. 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. UPS’ package volume is directly impacted by e-commerce sales since many online retailers, such as Amazon (NASDAQ:AMZN), employ UPS’ services in order to offer their customers timely and economical delivery of products.
In the past (prior to 2014), UPS's margins declined due to the growing number of lightweight yet bigger packages. Since these packages were priced on the basis of their weight, they generate lower revenues due to lesser packages carried per vehicle or aircraft. In order to realize better prices from such packages, UPS decided to follow a dimension-based pricing strategy which has resulted in an increase in pricing of the lightweight yet bigger packages. This strategy has helped improve margins.
Increased international trade in finished goods translates into more packages shipped over long distances. But the potential benefits of international trade for UPS are not limited to growth in the parcel carrier market. Many developed world businesses already purchase materials they use from abroad, and this practice, which is known as global sourcing, is on the rise.
For businesses, the downside of global sourcing is complex supply chains that present previously unknown risks. For businesses facing import/export regulations and international transportation logistics for the first time, the appeal of outsourcing supply chain management is obvious. UPS Supply Chain Solutions hopes to capitalize on a projected increase in the market for third-party supply chain managers.