Under the Spotlight Wall St: United Parcel Service, Inc. (UPS)

United Parcel Service (UPS) is an international colossus in the logistics and package distribution industry, with a history spanning more than a century. Founded in 1907 as a delivery company in Seattle, USA, it has transformed itself into a global force, providing a wide range of services that extend far beyond its initial scope.

Established by a young entrepreneur named James E. Casey with US$100 borrowed from a friend, the American Messenger Company employed a handful of teenagers equipped with bicycles as their mode of transportation. The company initially focused on local package deliveries, documents and retail purchases, and worked in partnership with the U.S. Postal Service.

Business expanded rapidly and in 1913 the firm acquired its first car, a Ford ($F) Model T. This allowed for speedier delivery and enabled the company to dispatch multiple packages at once to the same neighbourhood. The firm then merged with a competitor and was renamed to Merchants Parcel Delivery, before undergoing a further rebranding in 1919. It was then that the company acquired the name United Parcel Service and began to paint its delivery vehicles in its signature brown colour.

Sky's the limit

Looking to improve its delivery time, UPS ($UPS) launched its air service in 1929. As economies tanked worldwide due to the Great Depression, the innovation proved to be ill-timed and lasted for only two years. The idea still survived, though, and was reintroduced in 1953.

Initially shipping on commercial flights, UPS now owns 294 of its own aircraft and operates another 269. With about 2,000 flights daily, the company boasts an aerial footprint exceeding even well-established airlines like Emirates and Qantas.

That’s not to say its ground activities have lost importance. UPS operates a mammoth 125,000 vehicles and more than 1,000 distribution centres, warehouses and container freight stations across the globe.

Bigger and faster

The 1970s marked a period of significant growth for UPS and by 1975 the company was able to reach every address across the U.S. The decade also saw expansion overseas, with the firm commencing operations in Canada and Europe. In the 1980s, UPS began to deliver in Asia, Africa, Latin America and the Middle East as well. Today, the company reaches more than 220 countries and territories across multiple continents.

The 1980s also saw an important uptick in delivery speed as UPS launched next-day delivery across the U.S., before slowly rolling it out to other countries. UPS’ pioneering innovation helped it to gain significant market share as competitors struggled to achieve the same feat.

Delivering results

Courier and package delivery companies have existed for decades, as UPS’ history shows, but the rise of e-commerce has made the industry skyrocket. So it’s no surprise that UPS’ revenue has consistently grown since 2012, rising from US$54b in that year to US$100b in 2022.

The company now ships on average 23.4 million packages and documents per day, at an average price of US$20.71 per piece. Sales volumes in the U.S. are much bigger than overseas, with the U.S. responsible for 65.9% of the firm’s revenue. International deliveries account for 19.6% and logistic services (that cater for businesses that choose to outsource logistic solutions) make up 14.5%.

While being so reliant on the U.S. market for the majority of its revenue presents a risk to the company should business in the country slow dramatically, being solidified as one of the key players in the world’s largest economy in an industry with big barriers for entry represents a major advantage for the firm.

Economic strength

UPS’ stock trades at around 18x price-to-earnings ratio, while its biggest competitors FedEx ($FDX) and DHL trade in the 14x range. While FedEx’s and DHL’s net income margin sits at 4.80%, UPS’ is significantly higher at 7.37%, suggesting some investors are willing to pay a premium for UPS’ shares because of its greater profitability compared to its counterparts.

UPS’ superior financial performance could be attributed to many different factors. One is the calibre of its employees, as truck drivers receive significant training to maximise efficiency, allowing for speedier deliveries. The firm’s labour force is so skilled that some of them make up to US$170,000 annually.

Furthermore, UPS enjoys an advantage over its competitors due its niche in B2B sales, where the company directs much of its efforts. In contrast, FedEx’s biggest selling point is its delivery speed (even if at higher prices), while DHL focuses on international shipping.

Leverage could also be deemed to potentially play an important role in UPS’ dominance over its competitors, as the company’s debt to free cash flow ratio sits at 14x, while DHL’s is in the 10x range. FedEx has a ratio similar to UPS’, but the firm does not appear to benefit from this as much as UPS.

UPS’ leverage also has a downside and while it helps to enhance returns during periods of low volatility, it also adds significant risk to the business, especially during turbulent times.

Cautious outlook

Despite UPS’ impressive figures, the firm’s revenue dropped from US$100b to US$90.5b in 2023. Internationally, average daily volume slumped 8.3%, primarily due to softness in Europe, while logistic services also dragged down results as excess capacity led to revenue in this sector dropping 11.4% year-on-year.

As interest rates rise and consumers struggle with the cost of living across the globe, e-commerce sales might be affected. UPS doesn’t believe it will see new all-time revenue highs in the near term, with the company forecasting revenues around the US$92b - US$94.5b range in 2024, an increase of 1.6% - 4.4% on the previous year. But with UPS known for delivering faster than expected, it cannot be ruled out that the same thing will happen with its earnings.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.