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Will 2016 Be United Parcel Service's Worst Year Yet?

By Justin Loiseau – Jan 30, 2016 at 9:00AM

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Will United Parcel Service deliver this year?

Source: United Parcel Service. 

United Parcel Service (NYSE: UPS) is one of the biggest players in an industry that's expanding at record paces. So what could possibly go wrong? Turns out, a lot. Let's dig deep to see whether 2016 will be United Parcel Service's worst year yet.

Volatile Variables
In 2013, United Parcel Service hired 40,000 seasonal workers to deal with growing holiday delivery demands. In 2014, that number jumped to 50,000. This past year, UPS expanded its ranks, once again, adding a whopping 55,000 workers to its normal force. That's massive growth, and is just one of the many signals that the logistics-delivery business is booming.

But booming business isn't always good. United Parcel Service has to deal with countless variables that are more erratic than ever before. On the personnel side, expanding its work force by more than 20% for a few crazy weeks is incredibly tasking. If it hires too few folks, Santa Claus misses his delivery date. If UPS hires too many workers, its margins take a huge hit during its most-important earnings season.

Energy expenses also introduce unwanted volatility. UPS counteracts price swings by hedging bets and tacking on indexed fuel surcharges, but more expensive oil and gas can affect demand. Even if customers don't stop shipping items, they may choose cheaper low-margin ground-delivery services instead of higher-margin air-shipment offerings. 

A Fatter FedEx Corporation

Source: FedEx Corporation. 

United Parcel Service is used to being the biggest delivery business around, but FedEx Corporation (FDX 0.19%) is trying to change that. Last year, FedEx Corporation announced plans to acquire Netherlands-based TNT Express for $4.9 billion in a bid to expand into Europe, and scale up to United Parcel Service's level. 

The deal is currently set to go through in mid-2016. If it does, FedEx will officially enjoy more European sales than United Parcel Service, and the two companies' overall sales will essentially be equivalent. 

The deal isn't cheap for FedEx, and United Parcel Service will -- for 2016, at least -- remain a superior stock in terms of solid margins and bigger dividend distributions. But investors will now think twice before pinning FedEx as a growth stock and UPS as a steady income investment, and that could affect where each stock heads in the year to come.

Emerging Competitors
FedEx Corporation isn't the only competition in town. Amazon.com (AMZN -0.77%), the largest e-commerce company in America, is sick and tired of dealing with FedEx Corporation, United Parcel Service, and USPS to deliver its products to its customers.

Amazon.com is making both strategic and innovative moves to internalizing logistics and cutting costs. On the pragmatic front, the company has set up sorting centers all across America, and purchased thousands of trucks to move its items between centers and warehouses. This past week, Amazon.com CFO Brian Olsavsky told analysts that these initiatives are meant to complement the work of logistics companies like United Parcel Service:

What we found in order to properly serve our customers at peak, we've needed to add more of our own logistics to supplement our existing partners. That's not meant to replace them...those carriers are just no longer able to handle all of our capacity that we need at peak. They've been and continue to be great partners, and we look forward to working with them in the future. It's just we've had to add some resources on our own. 

But Mr. Olsavsky might not be telling the whole story. Many of the more-innovative pilot projects Amazon.com has explored hint at aspirations of an industry takeover. From drone deliveries to an app-based platform that allows normal drivers to deliver Prime Now packages -- think Uber for postal services -- Amazon.com is exploring all angles of the delivery business.

Neither of these ideas are ready for a prime-time rollout, but they should serve as warning signs that the logistics industry may be ripe for disruption. If these pilots or others gain traction in 2016, investors could start to question whether United Parcel Service stock still deserves its stalwart status.

Sell United Parcel Service in 2016?
I own shares of United Parcel Service, and I won't be selling my shares this year. There are plenty of competitive complements between FedEx Corporation's expansion and Amazon.com's exploration, and no one is expecting United Parcel Service to reverse its excellent fundamental track record any time soon. But 2016 marks the beginning of many new considerations for this logistics business, and I'll be keeping a close eye on this stock in the year to come.

Justin Loiseau owns shares of Amazon.com and United Parcel Service. He also owns a very small drone that he uses to annoy his colleagues every Friday afternoon. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends FedEx and United Parcel Service. 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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Stocks Mentioned

Amazon Stock Quote
Amazon
AMZN
$93.41 (-0.77%) $0.72
FedEx Stock Quote
FedEx
FDX
$176.70 (0.19%) $0.34
United Parcel Service Stock Quote
United Parcel Service
UPS
$182.52 (-0.17%) $0.32

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