Many who relied on United Parcel Service (NYSE:UPS) to ship gifts to loved ones this Christmas may be fuming over the delivery delays, but investors in the express-delivery carrier have absolutely no reason to complain. After a slow 2012, UPS shares have returned an outstanding 46% this year, even hitting an all-time high last Thursday. Smaller rival FedEx (NYSE:FDX) lagged UPS until October, when an explosive stock buyback announcement sent its shares roaring; FedEx shares have rallied 57%.
With the delivery business closely tied to macroeconomic trends, a recovering economy in 2013 boosted UPS's sales. On top of that, booming e-commerce, led by online retail giant Amazon.com (NASDAQ:AMZN), has taken UPS' growth prospects to an entirely new level. In fact, Amazon's recent membership numbers point to a solid 2014, which bodes well for UPS. But with several headwinds also popping up this year, are there enough growth catalysts to propel UPS shares higher in 2014? Let's find out.
Why UPS is better off than FedEx
Customers apparently became more price-sensitive this year, and increasingly opted for ground shipping over the quicker but premium air cargo-based services. That resulted in a 1% decline in UPS's daily package volume for its next-day air service during the nine months ended on Sept. 30, 2013. But thanks to its dominance in ground transportation, UPS is less likely to be hit by the emerging trend than FedEx, which is more of an air-based delivery company.
The world's largest package-delivery company also did a commendable job in controlling costs, which boosted its nine-month operating margin to 13.7% from 9.4% in the year-ago period. FedEx's operating margin for the six months through November stood at 7.2%, improving only 0.5% year over year.
UPS steps on the gas
UPS continued to impress the market with its enthusiasm for natural-gas technology this year when it announced plans to purchase 700 liquefied natural gas vehicles and build 13 fueling stations by the end of 2014. UPS noted that these moves will save it 24 million gallons of diesel fuel annually. Given that fuel is among the major costs for delivery companies, UPS's initiatives should lay the foundation for substantial savings in the future. UPS also rolled out 100 electric trucks in California this year, substantiating its leadership position in operating an alternative-fuel fleet.
While business conditions remained more or less favorable, trouble with its labor unions posed a major headache for UPS in 2013. The company made a major breakthrough midyear when employees approved its national master contract. But several local unions voted against the contracts laid before them. With the conflicts remaining unresolved, 2014 should be a critical year for the company. Striking the right chord with its employees is essential to avoid any unforeseen trouble in the future that could jeopardize its business.
The huge opportunity
UPS expects to end the financial year with 3%-7% increase in earnings per share. But the surge in online sales this holiday season suggests that the company could be headed for a blowout next quarter. For perspective, Amazon added a whopping 1 million new Prime customers in just the third week of December, and a staggering 36.8 million items were ordered from the website on Cyber Monday alone. The fact that UPS and FedEx couldn't keep up with the demand, which delayed deliveries, proves how much room for growth these companies have. As Amazon's major partner, UPS can directly profit from the online retailer's booming business.
Forrester Research projects online retail sales in the U.S. to grow at a compounded rate of 9% through 2017, which is fantastic news for UPS and its investors. UPS also expanded its presence in China this year with two new logistics facilities, and now covers 87 cities in the nation. With Bain & Co. projecting China to overtake the U.S. in online spending this year, UPS is spot on with its business plans.
The Foolish takeaway
UPS's huge debt load of $11 billion may leave some investors wary, but the company repaid nearly $1.9 billion in debt and generated a solid $5 billion in free cash flow over the past 12 months, aside from holding $7 billion in cash and equivalents. That leaves enough room for UPS to boost its dividend again in 2014 after raising it by 9% this year.
With e-commerce soaring, UPS investors can look forward to exciting days ahead. That the market quickly forgot all about the company's failed takeover of TNT Express and continued to bet on its growth prospects this year speaks volumes about the confidence that investors have in UPS. And I don't see a reason why they shouldn't continue to remain bullish going into 2014.