UPS the best value play in the shipping + supply chain management business ?

 United Parcel Service (UPS) is one of the world’s largest shipping and supply chain management firms. It is head quartered in Atlanta, Georgia, and state as part of their company profile, “In 2021, we delivered an average of 25.2 million packages per day, totalling 6.4 billion packages during the year.” 

 

Over the past five years and during the pandemic has demonstrated the growing need for couriers as well as supply chain management to support the ever-growing e-commerce industry. As globalisation opens less developed worlds to global trade this will only persist in increasing for companies such as UPS to facilitate this growth. 

 

Recently UPS has seen headwinds along with its peers as seen in recent lockdown restrictions in China persisting. Resulting in a glut of capital allocated to China. However, what was indicative of UPS position in the industry was its ability to quickly allocate this glut to demand increases seen in Europe. Insert information about UPS from financials and conference call. This quick transition was unable to come to fruition for UPS’s peer FedEx which was unable to the quickly changing dynamics. 

 

 

Breakdown of business:

 

UPS’s business sees 60.7% of daily volumes in the business to consumer model, with its largest customer being Amazon accounting for 11% of its business being indicative of the current form of UPS. It is also at parity in 17 of the top 25 markets, showcasing UPS’s ability to compete across markets. 

 

 

Currently UPS’s business model can be broken down into three differentiated business segments:

 

·      U.S package 

·      International package 

·      Supply chain solutions 

 

The U.S package is currently the largest source of income for UPS making up 62% of total revenue. Following this the international package is the second largest source of income accounting for 20% of total revenue. As of right now UPS has a time in transit advantage in Europe over its competitors. Demonstrating their efficiency in highly competitive markets. Lastly the supply chain solutions remain the smallest source of income for UPS, with it being 18% of total revenue. However, included in the makeup of supply chain solutions is healthcare solutions. This involves in large part transportation of medical supplies i.e., vaccine which require specific conditions for the package to meet its destination in usable state. 

 

 

 

 

 

Notes on UPS closest competitor -> FedEx

 

In recent times it has been demonstrated that FedEx has continued to struggle to meet demand needs with its struggling network capacity. A new CEO at FedEx has renewed efforts for cost savings initiatives of $3 billion. As a result, they are shifting focus to improving ROIC which would raise their competitiveness with UPS, which has remained dominant in for a number of years. 

 

 

Breakdown of segments: 

 

U.S package:

 

In FY21 the U.S package saw strong rebound in business, with the operating profit rising from $3.9 billion to $6.4 billion a 65.4% increase. This was driven by a slight increase in daily volumes. However, changes in rates and product mixes resulted in greatest change for driving a large increase in revenue and operating profit. These changes in rates can be attributed in part UPS policy regarding demand surcharges. 

 

International package 

 

The international package saw strong demand with operating profit of $4.6 billion up from $3.4 billion in 2020 a 35.2% increase. This was accelerated by the return to norm in terms of business-to-business daily volumes. Express products have seen large increases in demand as customers look to send packages across as fast as possible. In terms of operating margin, the international package is the most profitable business for UPS. 

 

Supply chain solutions 

 

Operating profit saw a 61.3% increase, a common theme of demand exceeding supply was once again for supply chain solutions. Which resulted in demand surcharges which helped counteract this excess demand. As world continues to struggle with ocean freight supply chain struggles it can be expected that would continue to be a beneficiary. 

 

 

 

 

 

 

 

 

The uniqueness of UPS:

 

A standout feature of UPS is its unionised workforce, as most would see this as a large downside risk given the history of nature between unions and their employers. It has however not held back UPS in its endeavours to compete with its peers which lack a true unionised workforce.  This is demonstrated which UPS outperforming its unionised competitor FedEx in every key business aspect. 

 

 

Addressing inflation: 

 

The largest risk currently for businesses across the globe is inflation and its effect on input cost resulting in potential erosions income for years to come. For UPS as of the most recent investor call that have chosen to take steps forward for the coming year to reduce these effects of higher inputs cost for the business. By choosing to raise rates by 6.9% for the 2023 year.  

 

 

Where is the value in UPS?

 

A standout feature when I came across UPS’s financials was its consistent high performance in ROIC. With UPS demonstrating a 5-year average of 21.57 vs FedEx’s 7.06 and DHL of 22.27. A weird trend when comparing UPS and FedEx P/E ratio is that UPS is currently priced in slightly below its peer. Despite their continued outperformance in every regard, with 14.26 vs FedEx’s 14.96. It is also currently selling for a very attractive EV/EBITDA of 9.32.