Can UPS' Global Domination Continue?

United Parcel Service (NYSE: UPS  ) is the world's largest package delivery company. Yet it's not invincible. The question before us today is: Can UPS overcome its weaknesses and emerge as the investor's company of choice? Let's put UPS under the scanner and identify its strengths, weaknesses, opportunities, and threats.

Strengths
Courier king: UPS operates on a massive scale, with more than 2,800 operating facilities all over the world. In 2011 the company generated revenue of $53 billion, 7.2% higher than the previous year.

Rapid inorganic growth: UPS has a penchant for acquisitions, which has helped the company expand its overseas presence and also added to its coffers. In a $6.8 billion deal, UPS recently acquired TNT Express, a Dutch package delivery company, to expand its presence in Europe and also consolidate its business in Brazil and China.

Thick margins: UPS is not just a revenue grabber; it is also efficient in converting its sales into profits. This is evidenced by the fact that unlike rival FedEx (NYSE: FDX  ) , whose low net income margin stands at 4.8%, UPS boasts a net income margin of 7.2%.

Weaknesses
Heavy debt load: Although UPS operates efficiently, the company is burdened with a heavy debt load. At the end of 2011, its debt-to-equity ratio stood at an alarming 157%. Even though the company earns 17 times its interest expenses and has sufficient funds to cover them, it should take steps to manage its debt situation.

Barometer of the economy: UPS is highly dependent on the nature of the economy, which means factors such as recession, unemployment, and steep fuel costs translate into hard times for UPS.

Opportunities
Looking east: Emerging Asian nations, such as India and China, still have a considerably low penetration of package delivery services, making them the perfect regions for potential acquisitions by the company.

Online shopping: The recent boom in online shopping also means that an increasing number of people will require shipping services, which should translate into a potent source of revenue for companies like UPS. Online shopping giants Amazon and eBay regularly use its services to reach out to their customers.

Threats
Spiraling fuel costs: UPS has to contend with rising fuel costs that hurt margins and pinch profitability. In 2011 the company's revenue grew by 7%, while fuel expenses surged by a staggering 36%.

China challenge: Although China is a highly lucrative area of expansion for most organizations, including UPS, the recent slowdown in China's economy continues to be a source of concern. UPS' actual performance may not live up to its expectations in that region, but this story has yet to play out.

The Foolish takeaway
UPS has strong fundamentals, a broad market, and strategic acquisitions working in its favor. However, the company must not neglect its debt burden. I would keep an eye open for the company's quarterly results, which are expected to come out at the end of this month. Keep a close watch on the parcel carrier by adding it to your watchlist.

Emerging markets could create significant revenue streams for companies like UPS. To learn about other American companies that are tapping into these markets, download our free report, "3 American Companies Set to Dominate the World." The report won't be available forever, so I invite you to click here to get your free copy today!

Navjot Kaur does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of FedEx, Amazon.com, and eBay. Motley Fool newsletter services have recommended writing puts on eBay. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 11, 2012, at 11:55 AM, Paganpink wrote:

    UPS has a first mover advantage having been formed in 1907 and continues to be the primary innovator in the transportation industry. Each innovation is later copied by others. It started the first private air service in 1929 and had success with its "blue label" 2 day air service in the 1950's on, yet many think Fred Smith (and his primarily ex-UPS staff) were somehow solely responsible for the move to overnight air services when Fedex was formed in the 1970's. The tractor trailer networks and rail contracts UPS has developed over the last half century are unmatched and ultra efficient. UPS has positioned itself to be the primary player for future IN SPITE of its unionized labor force. That is the only advantage the other small parcel competitors have over them.

  • Report this Comment On April 11, 2012, at 6:59 PM, foolishdon100 wrote:

    Fuel costs up 36%?? Kinda useless info by itself. What % of sales is fuel costs. Also they have built-in fuel surcharges to cover these increases. I think you engaged the pen before the brain on this one!

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