If good things come in small packages, the folks at United Parcel Service (ticker: UPS) will want to consider whether a bad thing will come its way in a very, very large package. The delivery date is uncertain, but the irony here is that it could arrive by way of its largest customer.
That would be Amazon.com (AMZN), which accounted for more than 6 percent of UPS business in 2015, according to Jon Budish, investment strategist in residence at Fairleigh Dickinson University’s Silberman College of Business.
Yes, people laughed when Amazon revived talk late last year of its downright wacky drone delivery project. But its other transport effort is no laughing matter to UPS: “Amazon is leasing 20 Boeing (BA) jets to begin operating their own air cargo network,” Budish says.
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Granted, UPS could have the muscle to weather any Amazon storm. It’s the world’s largest package delivery company, ahead of rivals FedEx Corp. (FDX) and the privately held DHL Express. And the Atlanta-based company, which dates to 1907, has shown steady performance since it went public in 1999.
“UPS generates healthy income, now yielding more than 3 percent, over long periods,” says Michelle M. Buckley, a research analyst with F.L.Putnam Investment Management Co. in Wellesley, Massachusetts.
That’s the history; now for the present. UPS currently trades up more than 8 percent from a year ago. And it’s going to great pains to change its delivery logistics in the digital age. Buckley says UPS “has drummed up compelling offerings to improve delivery services in an e-commerce world.” These include Access Points, a service offered in the U.S. and Europe that uses local retailers as points of delivery.
“This enables consumers, particularly apartment dwellers, to more easily retrieve packages from a neighborhood convenience store, for instance, than suffer repeated failed delivery attempts,” Buckley says. (As many consumers know, UPS has a knack for making recipients jump through hoops to get packages they’re not at home to pick up.)
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What’s now more convenient for customers has comforted investors, as marked by the company’s performance in the fourth quarter of 2015. Earnings were higher than expected at $1.57 per share versus the $1.42 analysts predicted — and reflected a 26 percent rise year over year, driven by growth in its international business.
Observers also get excited over the company’s potential to cash in on the ever-exploding world of e-commerce.
“We like the business and view it as a great way to participate in the continued growth of online retailing,” says Jim Wright, a portfolio manager on Covestor and chief investment officer of Harvest Financial Partners in Paoli, Pennsylvania. “Because, of course, every time you place an online order with Amazon, or Wal-Mart Stores (WMT), or Apple (AAPL), those packages need to be delivered by someone.”
But last year’s fourth quarter wasn’t all a box of bread, as revenue of $58.36 billion just missed the mark, falling short by less than 1 percent. All told, if the numbers resemble the stuff of a split decision, it’s certainly reflected in current forecasts.
Ten of 16 analysts call UPS a “hold,” with five rating it a “strong buy” and one a “sell.” But at least Brown, as the company is affectionately known, is out from under the red. In late 2014, shares dropped a shocking 10 percent when expected earnings of $1.47 a share were off by 22 cents — a damaged package by any Wall Street standard.
In part, fluctuating expenses — an overreaction to bungled holiday delivery — played a role, says Logan Purk, industrials analyst at Edward Jones in St. Louis. “UPS has faced major hurdles related to the peak season during the holidays. In 2013, they were understaffed and did not perform well. In 2014 they were overstaffed, which raised expenses relative to volumes. In 2015 they finally got it right.”
And going forward, the company faces significantly less in the way of cost headwinds. “They should perform well in a steady to slightly growing economy with relatively low energy costs,” Budish says.
They’ve also benefited from the acquisition of Coyote Logistics in 2015. “Coyote is expected to bring in $100 million worth of synergies to help UPS to expand to its service platform,” says K.C. Ma, director of the George Investments Institute at Stetson University in DeLand, Florida.
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Granted, it’s not as though Amazon’s ambitious delivery plans are going away anytime soon. “Amazon could continue to grow this business and service more and more of its own package volume,” Purk says. “This could result in lost business and further pressure on pricing related to Amazon shipments.”
But could it really hurt UPS that much? Ma points out that Amazon would have a lot of catching up to do before it comes anywhere close to matching what UPS has built. For Amazon, a delivery system would represent a mere cost-cutting measure amidst a sea of other priorities; for UPS, it’s the heart of what they do. Maybe Amazon should stick to dreams of drones.
The bigger challenge could come in the form of FedEx, a fierce competitor not known for backing down. And while comparatively clumsy, the U.S. Postal Service offers cheaper shipping alternatives.
Meanwhile, count Purk as one of the many calling UPS a hold. Yes, it’s the top dog in ground delivery — but still needs to show investors it’s grounded for the long term.
“It should benefit from continued growth in e-commerce shipments,” Purk says, “but we think this outlook is currently reflected in the share price. We believe shares are fairly valued at current levels.”
As for what it would take for UPS to truly deliver, Wright says: “To us, UPS at $100 per share is not a great value. But, if we could purchase it in the mid-$80s — and it came close — we would be very excited to own the stock.”
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The Ups and Downs of UPS originally appeared on usnews.com
