United Parcel Service (UPS) is the world’s largest package delivery company and a global leader in supply chain management. Nicknamed “The Big Brown Machine” for its easily recognizable brown trucks, it was founded in 1907 as a private messenger and delivery service in Seattle, Washington, and has since expanded, through both organic and acquisition-led growth, to include a fleet of more than 100,000 vehicles and 500 aircraft. Today, the company is headquartered in Atlanta, Georgia, and delivers an average of more than 15 million pieces daily to around six million people in over 200 countries and territories worldwide. Its major competitors include the United States Postal Service, FedEx Corporation (FDX), as well as a number of international operators, both private and government-run.
UPS has three reporting segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. The former two are engaged in the delivery of letters, documents, and packages, and together comprise roughly 80% of consolidated revenues. The latter segment, which accounts for the remaining portion of the company’s revenues, is comprised of its forwarding and logistics operations, its freight operations, and other related businesses.
The company’s core package delivery operations utilize a fairly straightforward business model: customers pay UPS a fee depending on the particular weight, size, and destination of their item. Meanwhile, the company’s forwarding and logistics business offers supply chain design and management, freight distribution, customs brokerage, mail, and consulting services to businesses in exchange for various fees. In addition, UPS runs personal mailbox and supply-chain related financial services businesses.
UPS’ top- and bottom-line results tend to be relatively stable; its leading market position and global geographical presence allow it to benefit from a durable competitive advantage derived through its expansive distribution, transportation, and communications networks. Although the most recent recession saw revenues and share earnings each take a dive along with the rest of the economy, they bounced back nicely in 2010, benefiting from continued strong demand from Chinese and German markets, a rebound in domestic retail sales, and ever-increasing e-commerce revenues. Elevated fuel costs and extremely poor weather conditions put some pressure on the bottom line, but were more than offset by increased fixed-cost absorption due to package-volume advances.
Though unfavorable weather and fuel-cost conditions persisted through February and will probably hurt first-quarter results, we, nonetheless, think full-year revenues and share earnings could reach record levels, bolstered by further fixed-cost leverage as well as a greater percentage of sales being derived from higher-margined international transactions. Moreover, due to recent restructuring efforts implemented in light of the lackluster economic climate, the company should soon begin to benefit from a leaner and more efficient operating structure.
UPS has consistently focused on international expansion; in 2010, the company opened more than 100 new locations as well as a new intra-Asia hub in China. Moving forward, investment abroad will likely continue as the company attempts to further take advantage of fast-growing developing economies. Moreover, the increasingly globalized economy should result in more fluid and pervasive international transactions, which augurs well for the company’s top and bottom lines.
UPS, also known as “Big Brown” has a strong capital structure. The company uses a relatively modest amount of operating leverage, with long-term debt representing around 50% of total capital. Moreover, fairly recurrent cash flows and a solid supply of working capital allow it to spend a sizeable amount on further capital investment (as enumerated above) as well as shareholder returns. In 2010, the company repurchased more than $800 million shares in order to curb the effects of stock-compensation-related dilution. Moreover, it recently increased its dividend payout for the second consecutive year. Moving forward, management has indicated it intends to repurchase another $2 billion of shares this year, as well continue to focus on the dividend payout.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.