United
Parcel Service: A Dividend Growth Stock Expanding Its Services And Image
Disclosure: The author has no positions in any
stocks mentioned, and no plans to initiate any positions within the next 72
hours. (More...)
Summary
·
UPS's strategy to better accommodate its peak holiday deliveries
caused it to overspend on holiday delivery preparations.
·
The company is working to address its past holiday delivery
missteps by balancing cost efficiency with meeting peak package volume during
its busiest delivery dates.
·
To help align costs, the company will expand capacity at
shipping hubs in key areas to reduce the need for temporary workers and
training costs.
·
UPS is also focusing on more profitable markets, such as the
healthcare market, where a shipment must arrive expeditiously and at an
appropriate temperature.
·
As the company resolves its past missteps and expands into more
profitable markets, shareholders will be rewarded with a substantial dividend
and share buybacks.
United Parcel Service (NYSE:UPS)
is the world's largest package delivery company. Recently, the company's shares
have been struggling near its 52-weeks lows as it struggles to overcome its
past missteps. Over the past year or so, UPS attempted to adjust its Christmas-delivery plans,
after being overwhelmed by packages it needed to deliver in 2013. The attempt
to better handle its holiday deliveries caused it to overspend on delivery
preparations in 2014. As the company moves forward and continues to adapt, it
will start charging some customers more for peak-day shipping, and will avoid
hiring too many seasonal workers. In 2014, UPS spent $675 million and hired
100,000 part-time workers to better prepare for its busy holiday season. During
the company's holiday season in 2014, however, it experienced uneven package
volume, with its busiest day experiencing deliveries 100 times more than
normal, while workers sat idle on others. Subsequent to UPS's holiday 2014
missteps, the company now understands its problems, and understands that it
needs to balance cost efficiency throughout its fiscal year, but also be able
to handle its busiest delivery dates without spending too much money to do so.
UPS experienced $200 million in cost overruns in its 2014 fourth
quarter. Such cost overrun will continue to adversely affect the company's
results in 2015. In addition, increased pension expenses of $190 million and
adverse currency effects will also depress its earnings in 2015. To help align
costs this year, UPS will expand capacity at shipping hubs in key areas to
reduce the need for temporary workers and training costs, and accelerate
deployment of its technology that schedules deliveries more efficiently. It
will also add peak delivery period surcharges. UPS has a history of rewarding
its shareholders with substantial share buybacks and yearly dividend increases.
The company's shares currently yield about 3.0 percent. We believe that
potential investors have a unique opportunity to purchase UPS shares near their
52-week low and be rewarded with a substantial dividend yield while the company
works to resolve its past missteps. In addition, UPS, as stated below, is
beginning to move further into ancillary package delivery-related markets, such
as the healthcare market, that will reward the company with increased profit
margins.
Background
UPS is the world's largest package delivery service provider, but also offers
various logistics and financial services. The company delivers packages
domestically and internationally. It handles the majority of its daily domestic
shipments using its ground delivery service. UPS delivers international
shipments to more than 200 countries and territories worldwide, and provides
delivery within one to two business days to the world's major business centers.
The company's international services include export deliveries (packages that
cross national borders) and domestic deliveries (packages that stay within a
single country's boundaries). UPS provides domestic services in 20 major
countries, and continues to invest in infrastructure and technology in Asia.
The company also has a supply chain solutions division that provides logistics
and distribution services, international trade management, and transportation
and freight using multi-modal transportation. The company's capital business
offers asset-based lending, global trade finance and export/import lending.
Fourth-quarter 2014 earnings
In the company's latest earnings
report, UPS announced adjusted earnings per share of $1.25,
unchanged from the year-ago quarter. The results were adversely effected by
higher-than-expected expenses during the holiday season.
Total revenue for the quarter increase 6.1 percent from the
year-ago quarter to $15.9 billion, as the company experienced revenue growth
across all the three of its divisions. UPS delivered 1.3 billion packages in
the fourth quarter of 2014, an 8.1 percent increase.
Its U.S. domestic package revenues increased 7.5 percent from
the year-ago quarter to $10 billion, and operating profit for the division
decreased 5.3 percent to $1.1 billion.
International
package revenues increased 5.9 percent from the year-ago quarter to $3.4
billion, and operating profit for the division decreased 0.2 percent. Supply
chain and freight revenues increased 7.4 percent, and operating profit for the
division increased 4.7 percent from the year-ago quarter to $179 million.
The company bought back more than 26 million shares for about
$2.7 billion in 2014. UPS expects 2015 adjusted earnings to be in the range of
$5.05-5.30, reflecting 6 percent to 12 percent growth from 2014. The company
also maintained its long-term estimated earnings per share growth rate in the
range of 9 percent to 13 percent.
Company begins emphasizing services
to businesses
UPS is essentially known for
delivering packages. The company, however, in recent years, has sought to change its image and focus more of its efforts on
more profitable markets, where it can offer additional services; such as in the
healthcare market, where a shipment must arrive expeditiously and at an
appropriate temperature. To accomplish its goals of expanding it services, the
company has built warehouse complexes with refrigeration. It has also become
more active with respect to e-commerce package returns, an expensive logistical
problem for e-retailers. UPS also assists brick-and-mortar retailers with tasks
such as shipping packages from retail stores.
To communicate that UPS is more than just a package delivery
company, it launched a new global ad campaign targeting businesses. The
company's new advertising slogan is "United Problem Solvers", and is
meant to communicate its increasing emphasis on providing services to
businesses as global supply chains become more complicated. UPS's newest
advertising campaign highlights services, including temperature sensitive
health-care solutions, its ability to help grow small businesses and its
e-commerce expertise for retailers. The company's advertising efforts do face
some challenges, as it is so well known to many customers and potential
customers as a package delivery company that it is difficult for UPS to change
perceptions that it is more than a package delivery company. We believe that
the company's package delivery expertise will serve it well in the new markets
that it pursues, and UPS, as well as shareholders, will be rewarded by the
company's efforts over the long term.
Our view
UPS's expanding healthcare-related
business, shipment and productivity improvements will continue to drive growth.
In addition, the company's strategic investments, technology-supported
operations and enhanced global network will strengthen its market position and
protect the company against unfavorable market dynamics.
Adverse near-term factors the company faces include labor
unionization issues, competitive threats from competitors such as FedEx Corp.
(NYSE:FDX) and overall adverse economic turmoil.
In addition, UPS has struggled with improving profitability as
large e-commerce retailers such as Amazon.com (NASDAQ:AMZN)
request and obtain larger discounts and the number of higher-cost residential
deliveries related to e-commerce increase. Air express deliveries have also
become less profitable as shippers increasingly choose slower, cheaper methods
of shipping, or send documents digitally. In the current year, UPS is likely to
experience growth in U.S. domestic revenues and improving international
revenues, as lower pricing is offset by higher package volume. The company,
however, will also strategize to improve its operating margins by better
focusing on cost and efficiency when addressing the challenges it faces in
making deliveries during peak delivery periods.
The current
price-to-earnings ratio for UPS shares is about 29.45, and the shares yield 3.0
percent. UPS's forward price-to-earnings ratio is about 18.70 based on 2015 earnings estimates of $5.16, and about 16.75 based
on 2016 earnings estimates of $5.77. The price-to-earnings ratio for the
company's shares is at the lower-end of its 10-year historical
price-to-earnings range in the mid-to-upper teens. Further, earnings estimates
have fallen substantially over the last 3 months for the years 2015 and 2016.
We believe that potential investors should wait for UPS's share price to drop
to the $86.50-92.30 price range before establishing a full position (a forward
price-to-earnings ratio in the range of about 15.00 to about 16.00, based on
2016 price-to-earnings estimates). A well-timed investment in UPS shares will
allow an investor to be rewarded with a 3.0 percent dividend yield, substantial
share buybacks and share price appreciation over the long term.
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