June 23, 1999

July 21st News Flash! UPS To Go Public

United Parcel Service of America
55 Glenlake Parkway NE
Atlanta, GA 30328
Phone: 404-828-6000

by Yi-Hsin Chang (TMFPuck)

Ownership: Essentially Employee-owned
Competition: Federal Express, DHL, U.S. Postal Service
A Future IPO? No plans
The world's largest package-delivery company United Parcel Service of America's latest ad campaign stresses a little-known fact: "UPS. Internet business' three favorite letters. (Next to IPO.)" In smaller print, one ad in national news magazine says, "We've been the most popular delivery company for online shipments since some of those Internet whiz kids were just millionaires."

In fact, UPS is the shipping industry leader in e-commerce and ships for 6 of the top 10 Internet retailers including Amazon.com. According to a Zona Research study, the Atlanta-based company delivered 55% of online purchases during the 1998 holiday season. Actually UPS does more than deliver products ordered online; it offers a full line of e-commerce solutions to businesses, including tracking and calculating tools and online document exchange.

Playing off its slogan "Moving at the speed of business," the company's TV ads now say, "Moving at the speed of e-business."

Last year, UPS delivered 3.14 billion packages and documents to more than 200 countries around the world -- that's 12.4 million packages and documents a day. Its 1998 revenues totaled $24.8 billion, up 10.4% from the prior year, which had been hurt by a 15-day labor strike. For the last four years, including the stagnant year that resulted from the strike, revenues have grown 6% a year on an annualized basis. Last year, net earnings increased to $1.7 billion from $909 million. UPS is ranked third among Forbes' list of the 500 Top Private Companies.

Unfortunately, the company says it has no plans to go public. It makes enough money that it can make long-term investments in strategic areas without outside help -- including investing $1 billion a year in technology. It is a AAA-rated company that appears conservative from an investment perspective. Unbeholden to public shareholders, UPS emphasizes measured, consistent growth.

The company does report earnings, however, every quarter, just like all public companies. That's because UPS has a rather unique ownership structure: It's essentially employee-owned. It is probably the largest private, employee-owned company in the world. What started out as an ownership program for managers in the first half of the century has evolved to include supervisors in the late '60s and then all employees -- full- and part-time -- with at least one year at the company. Of some 327,000 employees, 120,000 are shareowners.

The company's board, led by Chairman and CEO Jim Kelly, determines the stock price on a quarterly basis. As of May, UPS stock was worth $47 a share and paid a $0.55 dividend twice a year. The quarter before it was valued at $43, so the stock essentially rose 9.3% in one quarter and 38% in one year from $34 a share. Not a bad incentive to work for the company. Plus, UPS has a managers incentive program in which 15% of pre-tax profits are paid out in stock.

UPS faces stiff competition from rivals Federal Express (NYSE: FDX), DHL, and the U.S. Postal Service, and in terms of volume, it is still recovering from the devastating 1997 strike. The good news is that it has a five-year labor agreement in place and is working with new Teamster leadership. Turnover among UPS drivers is now less than 4%.

There appears to be renewed excitement at the company with its e-commerce strategies bearing fruit and its international operations finally posting an annual profit after 11 years of expansion. In the next five years, the company plans to deploy technology that will allow it to continue to introduce new services.

UPS has a solid business model and a strong brand and image. It's one of the few companies that is actually making money from the Internet boom. Too bad it won't deliver some stock to us non-UPS employees.

Next -- Vanguard Group

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