The strategy being pursued by UPS (UPS, Financial) has the potential to transform its financial and stock price performance. It is seeking to become increasingly efficient, with a major capital expenditure program set to lead to improved profitability and free cash flow in the long run. It is also offering innovative programs as it seeks to capitalize on the growth potential offered by an increasingly popular e-commerce sector.
While there is a potential threat from Amazon’s move into delivery services, the overall prospects for the business seem to be sound. Therefore, it could offer investment appeal for the long run.
Transformation potential
In the last year, the UPS stock price has risen 7%. That’s a disappointing performance compared to the S&P 500, with the index gaining 16% during the same time period.
One potential catalyst on the UPS stock price could be its transformation plan. This includes a major capital expenditure program that will see it spend 8.5-10% of revenue over the next few years. The capital is being invested in the creation of a Smart Logistics Network that will help to save the company around $225 million of operating penalties, as well as make it more efficient. This should help it to capitalize on the growth opportunity presented by e-commerce volume growth, which is set to continue rising over the medium term.
In addition to increased spending, the company is seeking to make changes to its business model. It is aiming to become increasingly efficient so it can target high growth in key segments. A voluntary retirement plan could help the company to become a leaner entity in the long run, while a more global approach to its working capital and accounts payable has resulted in an improved outlook for working capital and, subsequently, free cash flow for the 2018 fiscal year.
Alongside this, the company is focusing on potential blockchain solutions. The technology is set to form an important part of the customs broker offerings and parcel management systems. It could help to bring increased paperless solutions to the business, which could improve efficiency yet further.
Growth opportunity
The financial performance of UPS could also be improved by its My Choice Deals program. It provides retailers with a platform to target 43 million UPS My Choice members with related deals while they are checking the delivery status of their orders. Although the deals program may not be a game changer when it comes to revenue growth in the near term, its aim is to increase usage of the My Choice program. It provides customers with a means of tracking their packages and specifying where they should be delivered. Premium members paying $40 per year also receive options such as delivery date change, faster shipping and two-hour delivery windows.
The major benefit of the My Choice program for UPS is that it helps to reduce the last mile delivery cost. If My Choice can continue to grow through the offering of a range of deals from retailers with whom UPS has an existing relationship, it could help to reduce costs and boost its financial performance in the long run.
Possible threat
The decision by Amazon (AMZN, Financial) to launch its Delivery Service Partners program could be seen as a threat to UPS over the long run. The company recently announced an order for 20,000 vans, which will be leased to budding entrepreneurs who have signed up to the retailer’s program. They will form their own logistics services and deliver the company’s products in their local areas. With Amazon and UPS having a long-standing partnership, the former’s move into providing its own delivery service could lead to reduced demand for the latter’s services in future years.
For UPS, though, there does not seem to be a lack of volume growth ahead. The e-commerce segment is set to continue to grow in the future, and this means that there could be sufficient demand for its services even with the potential loss of custom from Amazon. The company’s main focus is on margin improvements through efficiency programs, which could lead to stronger financial performance in future.
Amazon’s move could also reduce the pressure on UPS during peak delivery periods, such as during the holiday season. Since predicting peak demand is notoriously challenging, Amazon’s move into a delivery service could create a more stable growth outlook for UPS over the medium term.
Verdict
A focus on becoming increasingly efficient could boost the financial outlook for UPS. Its transformation program seems to be relatively sound, while initiatives such as the My Choice Deals offering could help to improve free cash flow and earnings over the medium term.
Although the move by Amazon into delivery could be seen as a threat, it may reduce the challenges associated with peak demand days. Volume growth could also be robust in future years as e-commerce growth seems likely to continue. As a result, the prospects for the UPS stock price seem to be positive. The company appears to offer investment appeal for the long term.
