United Parcel Service inc. (UPS, Financial) operates in one of the least disruption-prone industries in the world: transportation and logistics. The number one shipping company in the U.S. has steadily grown its revenues over the last five years and should continue the trend over the next several years, making UPS a great buy for investors who are ready to hold the stock for the long term.
The company's biggest strength has always been its ground game in the U.S. In fiscal 2016, UPS reported $25.60 billion in revenue from U.S. domestic ground operations, accounting for nearly 63% of its total revenue. With nearly half of its revenue coming from ground delivery, the company's fortunes are going to swing up and down with this segment. But fortunately for UPS, its largest revenue generator is also the one experiencing the fastest growth.
In the last five years, daily domestic package volume has increased from 13,896,000 to 16,245,000, growing nearly 17%, while average revenue per piece marginally decreased from $9.38 to $9.25. UPS was able to hold on to the pricing while volume kept increasing year after year.
UPS’ ground volume has increased over the last five years due to growth in e-commerce and retail. Business to consumer (B2C) shipping accounted for 45% of U.S. domestic package volume in 2016 and grew 12% for the year, directly impacting overall growth rates.
E-commerce is what primarily drove the company's ground volume and revenue up in the last 10 years in the U.S. market, which it will continue to do for many more years to come.
Per the U.S. Census Bureau, e-commerce sales accounted for a mere 8.9% of total retail sales in U.S. during the second quarter of 2017. According to an Aug. 17Ă‚ bureau press release:
“The estimate of U.S. retail e-commerce sales for the second quarter of 2017, adjusted for seasonal variation, but not for price changes, was $111.5 billion, an increase of 4.8 percent (±0.9%) from the first quarter of 2017. Total retail sales for the second quarter of 2017 were estimated at $1,256.2 billion, an increase of 0.5 percent (±0.4%) from the first quarter of 2017.”
Despite all the talk about e-commerce disrupting traditional retail channels, it still holds a very small portion of the overall U.S. retail market. With all the big-box retailers now working to develop their own e-commerce presence, however, this segment will continue increasing in size over the next several years. According to estimates, U.S. e-commerce is expected to double its current footprint and account for nearly 17% of overall retail sales by 2022.
The end effect is the bigger e-commerce grows, the more packages UPS gets to deliver.
UPS’ growth runway in the U.S. looks really long, which makes the company one of the best low-risk investments for the long term.
Disclosure: I have no positions in the stock mentioned above and have no intentions of initiating a position in the next 72 hours.
