3 Great Reasons to Watch United Parcel Service's Stock This Season

United Parcel Service is witnessing a decline in profitability and lower revenue per package -- is there enough long-term growth potential?

May 17, 2014 at 2:30PM

The harsh winter took a toll on package delivery giant United Parcel Service's (NYSE:UPS) performance for two straight quarters. First quarter's (ended March) stagnant revenue and slump in earnings gave a strong sense of déjà vu. Meanwhile operating challenges are increasing because of customers' preference for cheaper services over faster deliveries.

Investors' concern is apparent from the weakness in the company's stock -- charts show zero growth in United Parcel's share price in 2014. But there are three facts that can soothe investors' nerves.

Gaining "Ground" with e-commerce
United Parcel has dominated the $32 billion ground package delivery segment in the U.S. for years. Growth in the American economy and an increasing demand for e-commerce are providing a solid boost to the company's ground business. Its fleet of 103,000 ground vehicles far outnumbers archrival FedEx's (NYSE:FDX), which deploys 47,500 vehicles.

Source: Bloomberg; chart by author.

In the past quarter, United Parcel witnessed 4.4% growth in the ground segment average package daily volume, buoyed by higher demand for SurePost, a cost-effective but less-speedy service. Volume growth in the ground segment in 2012 and 2013 were mostly driven by a rising consumer preference for SurePost.

Source: United Parcel; chart by author.

The biggest boost to SurePost comes from the e-commerce boom, which is lifting online sales to a whole new level. Online sales in the U.S. went up 17% last year, and the trend is expected to continue in the current year, too.

SurePost, being a favorite with online retailers, could significantly add to United Parcel's revenues. Moreover, the courier giant's close association with online retail giant Amazon.com would come as an added advantage.

International trade is the key driver
According to the International Monetary Fund, or IMF, global trade has started improving from the latter half of 2013, and is expected to hold the momentum through 2014 and 2015.  The IMF has projected that most of the growth could come from developed countries, with a slight rebound in emerging economies. United Parcel, which is viewed as an economic bellwether, could be a big beneficiary of the improving trade scenario.

This past quarter, the company's revenue from its International segment grew 5% as global trade between the U.S., Europe, and Asia enhanced. Average daily volume grew 7.9%. Although, strong export activities in Europe were the main driver, United Parcel noticed a sizable amount of contribution from the emerging economies too. The higher volumes helped the company overcome a 2.1% fall in average revenue per package in the past quarter as customers continued to shift toward economical services.

International changes

Changes in international average daily package volume and international average revenue per piece. Source: United Parcel; chart by author.

United Parcel is not the lone beneficiary of this uptrend as FedEx too is gaining from higher global trade. Over the past few quarters, FedEx has managed to grow volumes in its international export packages and international domestic segments. The company has strengthened its transportation networks by acquiring companies and setting up several new service stations across Europe, Latin America, China, and Japan. 

United Parcel's international revenue is higher than that of FedEx and the company is aiming for more overseas growth. During the quarter, it expanded its air hub in Cologne, Germany,  and increased exposure in Latin America, offering services to companies of every size.

Continuous investments
United Parcel is spending on bettering technology and adding capacity to enhance its operating edge. One big area of focus has been optimizing delivery routes, which has always been a challenge for courier companies. In the past United Parcel has spent billions on upgrading systems to maximize efficiency. It's currently working on implementing the ORION (On Road Integrated Optimization and Navigation system) platform that will help find out the best route for timely parcel deliveries.

The courier giant is also planning to boost capacities to avoid situations like the one experienced last Christmas. Turbulent weather had led Americans to make last-minute online purchases that overflowed United Parcel's order book. Some deliveries were delayed, agitating customers. Not just that, the huge temporary recruitments made to deliver the products also pumped up the company's costs during its fourth quarter and even hit the profitability of the first quarter.

As the investments start paying off, United Parcel would be equipped to handle sudden volume growth, keeping operating costs under control.

To conclude
United Parcel has served its customers for more than 100 years, but CEO Scott Davis insists that the company's "just getting started". The company's dominant position in the ground package delivery business will get further impetus from the mushrooming online shopping growth. Budding international trade is playing into United Parcel's hands, and greater investment in technology could take it to new heights.

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ICRA Online has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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