Point72 Asset Management, L.P. is a family office managing the assets of its founder, Steven Cohen (Trades, Portfolio), and eligible employees. He is a billionaire hedge fund investor and the founder of SAC Capital Advisors. Cohen grew up in Great Neck, New York, and he attended the Wharton School of Business at the University of Pennsylvania.
Last quarter, the firm initiated a position in United Parcel Service (UPS), buying 351,800 shares. UPS is the world’s largest package delivery company, a leader in the U.S. less-than-truckload industry and the premier provider of global supply chain management solutions. The company delivers packages each business day for 1.6 million shipping customers to 8.2 million receivers ("consignees") in over 220 countries and territories. In 2014, UPS delivered an average of 18 million pieces per day worldwide, or a total of 4.6 billion packages. Total revenue in 2014 was $58.2 billion.
UPS' volumes have benefited from the rapid growth of online retail over the last few years. During the peak season last year, the company averaged more than 30 million deliveries per day, up 6 million from 2012 levels. In these two years, the company saw its peak volumes go from 55% above its average day to 75%. This trend is expected to continue with the growth of ecommerce businesses.
Ecommerce growth represents both opportunity as well as challenges for the company. On the one side, the company is benefiting from growing volumes, while on the other the company needs to work on optimizing its operations to make sure that improved volumes results in higher profitability. From a long-term perspective, the company continues to invest in technology and capabilities, with the aim to bend the cost curve lower. At the same time, it is also pursuing specific revenue initiatives that will improve yields and help UPS achieve its financial objective.
In the shorter term, the company is focused on addressing cost overruns that it is witnessing due to changes in its peak order volumes. The company plans to improve productivity with a tighter dispatch, improved helper utilization and reduced overtime. The company also plans to expand hub capacity in key areas, ultimately reducing the need for temporary sorts. So, additional hiring and training costs associated with staffing the new sorts and facilities will be reduced going forward with permanent capacity expansions. The company plans to adjust operations for better utilization of its network in 2015.
Analysts seem to be bullish on the company's plan. According to Goldman analyst Tom Kim, UPS has recognized “the need to improve its operations by investing further in hub automation and even change its pricing strategies to reflect the impact of ecommerce, especially during the peak days during holiday shipping season.” This will help the company reach 14%-15% operating margins which it used to enjoy in the mid-2000s.
Goldman Sachs (GS, Financial) recently upgraded shares of from Neutral to Buy with a target price of $119. According to Goldman's analysts, the company offers attractive risk-reward at current valuations, and consensus estimates look conservative especially after UPS' first quarter beat. William Blair analysts Nate Brochmann and Kyle Dicke have also mentioned the same theme as the Goldman Sachs analysts in their recent report. They believe UPS' plan to create a more efficient and flexible system to handle ecommerce shipments would help it become more profitable over the next few years.
UPS has a high value offering in the market, which its customers appreciate. The company has several growth opportunities outside general economic expansion. Ecommerce is expected to outpace global GDP growth by fourfold and cross border ecommerce is expected to grow even faster. These will be secular growth drivers for UPS. In addition, UPS' concentrated investment in growth industries like healthcare and retail puts it in a position to capitalize on market expansion.
United Parcel Service is trading at a forward P/E of 17.65x and has a forward annual dividend yield of 2.90%. Out of 29 analysts covering the company, eight are positive and have buy recommendations, 21 have hold ratings and none has a sell or underperform rating. The company's EPS is expected to grow 8.8% in the current year and 12% next year. I believe the stock is a good buy given its reasonable valuations and good growth prospects.
