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UPS Delivered Thanks to Strong Home Delivery Demand

By Lou Whiteman - Feb 12, 2021 at 9:31AM

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Will the momentum continue into 2021?

United Parcel Service (UPS 0.67%) ended 2020 on a strong note, as holiday shipping demand led to better-than-expected results. It was a good year to be in the delivery business, and UPS posted excellent results in 2020.

In this video from Motley Fool Live recorded on Feb. 4Industry Focus host Nick Sciple and Motley Fool contributor Lou Whiteman discussed the recently completed quarter and looked ahead to 2021. 

Nick Sciple: You mentioned earlier, UPS just reported earnings, e-commerce demand through the roof due to lockdowns and that people not wanting to be out of their home. What are we seeing from UPS out of their earnings report?

Lou Whiteman: I think anyone who has a recycle bin probably knows exactly what's going on with UPS. The number of Amazon packages and other cardboard you have out there. Sure enough, UPS had a great fourth-quarter report. They beat $2.66 per share on earnings from $24.9 billion of revenue. That was higher than consensus and consensus had been ratcheted up based on what FedEx and some of the others have said. The pandemic ended up being a good and a bad. We have seen B2C volumes soar, B2B lag, but the net-net is that the overwhelming surge in B2C offset a lot of the weakness they had in other parts of their business. Domestic package division saw a 17.4% increase year-over-year in revenue, it was the highest quarterly operating profit in company history. This is the right business for the time, this home delivery business, and it is really performing and we've seen that across the line with these logistics companies.

Sciple: Just to underline, when you say B2C business versus B2B business, what are the distinctions there?

Whiteman: B2C, business to consumer, this is taking the package to your house to my house. B2B, it doesn't have to be two businesses, it could just be running transport from warehouse to warehouse for a customer, but it is business shipping that does not end up in the last mile to the house. It's the simple way to think of it.

Sciple: Traditionally, UPS has been focused on this business-to-business shipping. Seeing this big shift toward business-to-consumer with the rise of e-commerce, changes in patterns of how businesses are working, how does this setup for UPS as a business? Obviously, being that its legacy business was around it's business-to-business shipping, those advantages are as applicable in this business-to-consumer world?

Whiteman: In the ideal environment, the business-to-business tends to be a lot more profitable. There's a lot less cost. The last mile cost us substantial. That does tend to drag down margins on the business-to-consumer. The interesting thing is that UPS isn't really caught in the post office model where you have to go to every house, but largely these days the last mile is to every house. The advantage in B2B, and the interesting part of it is you can be more selective, you can play in the areas you want. For UPS that has been whether it's refrigerated, where it's time sensitive, areas like that where you can pick your battles and try to find margin. That is a part of the business. Yes, they've done B2B forever, but most of their growth over the last decade or so has been to build out this business-to-business in the areas they want. One of the big questions for this company in 2021 is, how will this normalize? What will it mean for margins, or are we stuck in this rut for a while, because they very much want to see that B2B come back. They want that side of their business to outperform.

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