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A Successful Mix Earns Industry-Leading Margins for this Parcel Delivery Giant
Posted by: Vanina Egea (IP Logged)
Date: March 11, 2014 10:53AM

United Parcel Services (UPS) is the world’s largest parcel delivery company. Each business day, the firm transports an average of 16.9 million packages across 220 countries and territories. The company also provides global supply chain solutions and forwarding services in more than 175 countries, as well as truckload and less-than-truckload services throughout the U.S. It operates a ground fleet of 101,000 vehicles domestically and an air fleet of 523 units. Its package operations in the U.S. account for 61% of revenue, while its international deliveries generate another 21%.

One-of-a-Kind Fundamentals

UPS boasts one of the widest economic moats in the transportation arena. Its huge network, efficient scale, and cost advantages have enabled the firm to earn the highest margins in the industry. Compelling returns on capital of 15% average are also present, despite its intensely asset-based model. Its vast infrastructure includes enormous quantities of trucks, trailers, terminals, sorting equipment, IT systems and skilled labor. The business has high barriers to entry since huge investments and large package volumes are required to build, and support, its high fixed-cost structure. Likewise, the scale of its operations generates cost advantages that make pricing competition difficult for low-volume entrants.

Thus, UPS's leading margins are a result of a successful combination that includes greater package volume than its peers, focus on high-margin ground shipping, and also the use of an integrated network for the pickup and delivery of both express and ground shipments.

Through its single system, the firm attains greater efficiency than FedEx Corporation (FDX), which employs parallel networks to manage each unit separately. Moreover, FedEx handled an average of 8.8 million packages daily through its express and ground units at the domestic level, while UPS delivered 14.4 million in calendar 2013. Further, 12.1 million of its daily parcels were moved through its higher-margin ground service, almost doubling those delivered by FedEx in the same segment.

Profit Enhancers

In order to improve its performance levels, UPS has developed a number of initiatives. In 2013, the company announced the expansion of UPS Worldwide Expedited Service to reach more than 220 countries from its present 145 destinations. The firm also introduced route optimization software ORION, which will save fuel and optimize delivery routes. And, by the end of 2014, it aims to buy 700 liquefied natural gas vehicles and construct four refueling stations to further empower its ground operations.

In addition, the company is expanding its fast-growing health care business onto the emerging markets of China, India and Japan, establishing distribution facilities in the Asia-Pacific region. And to strengthen its European healthcare network, the firm acquired UK Polar Speed in 2014, which provides temperature-sensitive pharmaceutical supply chain solutions. Furthermore, UPS increased its rates for ground, air and international and air freight within and between the U.S., Canada and Puerto Rico by 4.9% for 2014.

A Sturdy Investment

UPS expects diluted earnings per share to be in the range of $5.05 to $5.30 in 2014, which represents growth of 11% to 16% in relation to 2013 adjusted earnings per share. As for volume, it forecasts 3% to 4% growth of the daily average, with exports reaching 4% to 6% increase. Additionally, operating margin is expected to be around 14%.

Further, the firm continues to enhance shareholders’ returns through permanent stocks repurchases and increased dividends. Its stock trades at 21.3 its trailing earnings compared to the industry average of 23.4 and its return on equity showcases an impressive 78.6% against its competitors’ median of 24.1%. Investment guru Lou Simpson (Trades, Portfolio) recently increased his holdings by 8.16%, backing my bullish feeling about UPS’s solid growth prospects.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

Stocks Discussed: UPS, FDX,
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