The rising fuel cost has negatively impacted the logistics and
transportation industry, which in turn has lowered top line growth
for logistics operator
United Parcel Service
). The company's overall revenue growth slowed down to 1.9% in 2012
compared to 10% in 2011. While recovery in the U.S. economy helped
UPS' domestic operations expand by 3.6% last year, its
international package business shrank by 1% during the same period
on account of currency fluctuations.
In 2013, UPS' stock price has climbed by 25% YTD as U.S.
domestic operations continued to see faster growth. For the first
half of 2013, revenues from U.S. operations grew 2.8% over H1 2012
compared to 1% for international operations over a similar period.
Strength in cheaper modes of transportation is expected to provide
an advantage for the company over competitor
), as customers look to lower transportation costs in a weak global
Our price estimate of $87.98 is in line with the current market
price of $88.93. Despite UPS' bleak performance in international
markets last year, we believe that the growth potential in emerging
markets will help UPS re-accelerate growth in its top line in the
future. The company derives close to 30% of its valuation from
international operations as per our estimate, and thus its
performance outside the U.S. can have a significant impact on its
Emerging markets are expected to see a reversal in trade
patterns in the future, with imports growing faster than exports.
However, the growth rate for these markets would still outpace
developed markets and logistics' operators benefit from an increase
in both forms of trade.
See Our Complete Analysis of UPS
UPS' Focuses On Expanding Its International Footprint;
China Remains A Key Market
Although Europe makes up more than half of the company's 29%
revenue share from international operations, the fast-growing
economies of Asia-Pacific and Latin America offer long term,
high-growth potential in domestic delivery markets. This is
supported by the fact that the Chinese, Indian and Latin American
GDP rose 7.4%, 5.5% and 3.2% respectively, in comparison to 2.1% in
the U.S. and -0.4% in the European Union during the same
In the Asia-Pacific region, China's domestic delivery market
holds huge potential. FedEx forecasts it to grow fivefold to
$26 billion in 10 years starting 2011. The country's burgeoning
e-commerce market will drive growth of the delivery business.
However, there is strong competition from local players in the
Chinese logistics' space which combined with stringent
regulations for international players can hinder UPS' growth
trajectory in the region.
In anticipation of an increase in export demand in the country,
UPS opened two new contract distribution facilities in China in
August 2013. One of the two distribution facilities is 47,000
square feet in size and is located in Chengdu, an important
economic center in Western China. The other facility is located in
Southern China in Shanghai, close to UPS's international hub at the
Shanghai International Airport.
We expect UPS' international export package revenues to increase
from $9.03 to $9.26 billion over our review period.
Acquisitions In Costa Rica Boost Footprint In Rapidly
Growing Healthcare Logistics' Market
Recently, the company announced its plans to acquire two Costa
Rican logistics companies specializing in shipping medical
equipment. Not only will the move give the company an opportunity
to have a stronger foothold of the Latin American domestic delivery
market, but medical transportation services offer fatter
margins. Shipping medical devices and equipment often requires
specialized handling and is the reason why shipping companies can
charge a premium for such services.
The company's management believes that the healthcare logistics
segment holds a huge potential. In India alone, the logistics
industry is growing at 15% y-o-y and the healthcare logistics'
market is expected to grow at three times the rate of the
logistics' market. The company has also introduced various new
freight shipment services in the past two months, with a
temperature-sensitive service being the latest. This service is
aimed at companies intending to transport cold chain
temperature-sensitive products such as specialty pharmaceuticals
and medical devices.
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