UPS (NYSE:UPS) has increased capacity on flights between Asia and North America after determining that a Q3 slowdown in volumes was an isolated occurrence. The delivery firm had previously scaled back routes to Asia when it recorded a drop in consignments of consumer electronics, echoing a slump seen by competitor FedEx (NYSE:FDX). But UPS Airlines President Mitch Nichols told Dow Jones the slowdown has now been reversed, bolstering the firm’s supply chain outlook.  If this division keeps expanding, we see a potential 17% upside to the stock’s value.
Supply Chain Back on Track for Expansion
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The average consumer probably doesn’t worry too much about how their favorite gadgets make it from factories in the Far East to their local retailers. But for Asian manufacturers, supply chain efficiency will often determine the success or failure of their business. Many such companies choose to forward freight through UPS – attracted to its fleet of 230 aircraft, its presence in 195 countries, and its ability to outsource logistics management functions.
Though supply chains account for just 8.5% of the UPS stock price according to Trefis estimates, we expect this division to become an increasingly vital revenue generator. After a sharp fall in demand during the global recession, supply chain revenues rose from $5.63 billion in 2009 to an estimated $7.13 billion this year. With high barriers to entry and a resilient economic outlook, we expect this growth to continue throughout the Trefis forecast period, reaching $10 billion by 2010.
Asian High-Techs Looking to North America
Based on our current models we have a Trefis price estimate of $84 for UPS, which equates to a 15% upside to the stock’s current price. Our bullish outlook would inevitably come under review if the global economy were to flag significantly, but recent research shows that even a slowdown in Chinese output is unlikely to undermine supply chain demand.
According to the UPS-sponsored survey, conducted by IDC Manufacturing Insights, 19% of Asian high-tech firms plan to source supplies and raw materials from North America over the next three to five years.  Higher demand on these routes will be driven by rising costs in China, while intra-Asian routes operated from UPS hubs like Hong Kong also stand to benefit. Whether strengthening links between America and Asia, or maturing new routes within Asia, UPS appears well placed to capitalize on continued traction in global economic fortunes.
This article was submitted as part of our Trefis Contributors program. Email us at firstname.lastname@example.org if you’re interested in participating.Notes:
- UPS Reverses Capacity Cuts On Asia-US Flights, Dow Jones, Nov 30 2011 [↩]
- UPS Survey Asia Intra-Regional Trade to Grow as Labor Costs in China Rise, UPS, Nov 9 2011 [↩]