With analysts expecting retail e-commerce to grow 13.7% this holiday season, to $188 billion, it looks like Santa will be working overtime in the logistics and package delivery industry. It’s a narrow field with few real competitors — sorry, Santa.
Sorry, too, United States Postal Service, which is on the brink of collapse and at best is hoping to secure its future by delivering parcels and mail slower. That focuses all eyes — and wallets — this holiday shopping season on the U.S. private-sector duopoly of United Parcel Service (NYSE:UPS) and FedEx (NYSE:FDX).
If last week’s ugly jobs data doesn’t rattle consumers enough to dial back online purchases, both companies will reap benefits. While FedEx is known for being lightning fast and boasting great global reach, here are five reasons you should bet on Brown to win the race.
- Size Matters. UPS is the global leader in small-package transport, delivering some 15 million packages a day. The company’s logistics and supply chain management operations offer a strong competitive advantage, particularly in the freight sector. The company is targeting the global market (where FedEx now holds an edge) with a $1 billion expansion of its high-tech UPS Worldport air hub, and a Global Operations Center for the UPS Airlines. By adding alternative-fuel vehicles and rearranging delivery routes, UPS was able to grow its U.S. package volume by 1.8% last year, while reducing fuel consumption per package by 3.3%.
- Solid Growth Strategy. In an investor conference in Louisville last week, UPS Chief Financial Officer Kurt Kuehn committed to grow revenue and boost profit over the next three to five years through stock repurchases of $700 million to $2.7 billion for the full year. That includes expansion plans for its European air hub in Germany and increasing capacity by 65%. Those and other efforts aim to deliver a return on invested capital of at least 25% by 2014, with free cash flow each year to exceed 100% of net income.
- Innovative New Services. Last week, UPS unveiled its My Choice service to increase the likelihood of a successful delivery on the first attempt. My Choice members will receive phone, e-mail or text alerts notifying them a day in advance of when packages will arrive and providing a four-hour window for the delivery. They also will have the option to electronically authorize release of packages that require a signature and, for a $5 transaction fee, to reroute a package to another delivery address or have it delivered to the nearest UPS Store location. A premium membership, available for a $40 annual subscription, adds more perks, including a two-hour delivery window.
- Meltdown of the Postal Service. “A penny saved is a penny earned,” Benjamin Franklin, the nation’s first postmaster general, once said. If he could check USPS’ books right now, he’d probably roll over in his grave. To stem the hemorrhage of money, USPS has already tried to reduce costs by $12 billion. It hasn’t helped. Now it needs to cut up to $3 billion a year in operating costs to stay afloat. USPS is currently studying nearly 250 processing facilities for consolidation or closure to reduce equipment by 50% and employee positions by as many as 35,000 jobs. But what’s bad news for USPS is great news for UPS. UPS is poised to pick up the slack left by the floundering postal service.
- Strong Fundamentals. At $66.59, UPS is trading 9.63% above its 52-week low of $60.74 in August. With a market cap of $65.31 billion, the stock has a price/earnings-to-growth ratio of 1.32, which indicates it might be slightly overvalued. UPS has reliably paid its dividends — the current yield is 3.1%. The company’s debt position could be better, with total cash of $5.64 billion to a total debt of $12.17 billion. Some analysts downgraded the stock as overweight last week, too. Even so, for the long term, UPS is well positioned for growth — as long as the recovery holds out and consumers keep buying online.
As of this writing Susan J. Aluise did not hold a position in any of the stocks mentioned here.
