UPS poised to gain from net shopping service plans to stay ahead of competitors with route improvements
UPS is a solid company poised to benefit from an improving economy and the growth of Internet shopping. It’s also building its competitive edge by developing more efficient route plans and taking advantage of opportunities in Europe.
“It’s got a good yield, it’s a very strong company — and it’s growing,” Stephen Desmond, stock analyst said. “Over time, I think it will do well.”
UPS, which gets 90percent of its income from delivering packages, has three big competitors: Deutsche Post, which owns DHL Express; Federal Express; and post offices around the world, with the most competition coming from the U.S. Postal Service.
UPS has a very healthy balance sheet and strong cash flow it could use to increase its dividend, make small acquisitions or pay down debt. As the economy has improved, the company has taken advantage of it.
“They have a significant amount of fixed costs they’re able to leverage when the economy is doing well, and we’re seeing big leverage of late,” Desmond said.
In the past, UPS was cut out of many potential delivery opportunities because retailers received merchandise from other carriers, and consumers took it home in their cars. Now, with the growth of Internet shopping, UPS has a whole new market to tap.
“UPS has the most expansive network in terms of delivering to far-flung homes in the middle of nowhere, so if a company wants to have a preferred delivery option, UPS has an advantage,” Desmond said.
He says the top executive at market researcher Forrester recently said that UPS and Federal Express have a big advantage over Deutsche Post in terms of technology, and UPS is investing money to widen that gap.
UPS previously looked at historical data about where deliveries went in order to plan the day’s routes. The company is installing a new system that uses real-time data to plan routes more efficiently, Desmond said.
UPS says that about 70percent of its freight is delivered on an express basis, meaning that in the continental United States most packages reach their destination in a matter of days. In Europe, only 10% of all package freight is delivered that way.
“We think there’s a lot of room there for a migration from standard delivery to express delivery,” Desmond said.
Desmond also noted that new competitors are unlikely in this business because the barriers to entry are “enormous.”
The biggest risk associated with this stock is the possibility that oil prices could rise even further. UPS spends about 3percent to 4percent of of its annual revenue on fuel.
Desmond isn’t particularly worried because much of the oil price increases are likely already reflected in UPS’ stock price, and the company levies fuel surcharges for jet and diesel fuel.
There is also a risk that unions representing many of UPS’ employees might strike. The company is in negotiations with the Independent Pilots Association, a union that represents less than 1% of its employees. UPS has a contract through July 2008 with the International Brotherhood of Teamsters, which represents slightly more than 60percent of its employees.
UPS shares are best for long-term investors with a low to moderate risk tolerance, he said.
Desmond started buying UPS shares in mid-June at about USD72 for client accounts and would buy them up to USD75. He says these shares have a downside risk of USD64, but could go as high as USD97 in the next three years.
