Buy, Sell or Hold: Is United Parcel Service Delivering for Investors?

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We all know United Parcel Service (NYSE: UPS) as the guys in the big brown trucks.

There's a reason why they are always in such a hurry: They handle over 16 million packages a day worldwide.

But what you might not know is their business model goes well beyond just being the world's largest package delivery company.

With service to over 220 countries, the Atlanta-based company also offers Supply Chain Solutions, including freight forwarding, fulfillment and returns. 

So bringing a package to your door is just part of the story for "Big Brown" and its share price.

But before I tell you whether or not to buy this big name bellwether, let's take a look at what keeps the wheels spinning at UPS.

Online Shopping is the 'Driver'

Despite the ongoing saga with the struggling world economies, UPS has fared remarkably well, showing strength and resiliency rather than weakness.

Part of the reason is the robust growth of e-commerce in the U.S-which simply means more packages and higher sales.

In its most recent report, earnings per share for the first quarter were $1.04, up 4% year-over-year.  Domestic package revenues were $8.27 billion, growing 3.3% year-over-year while operating profit grew more than 9%. To the plus side, operating margin also expanded by 70 basis points.

Overall, daily package volume grew 4.4%.  But there's more to this story than Amazon.com (NASDAQ: AMZN) and other online merchants. Traditional retailers are now also using their brick and mortar locations as distribution centers -- with UPS facilitating the deliveries.

But that's not the only thing that is changing on the delivery side.   

In 2011, UPS launched UPS My Choice, which allows customers to specifically direct the timing and circumstances of a delivery.  Since then, it has taken FedEx (NYSE: FDX) well over a year to catch up. That early advantage has delivered over 3 million My Choice subscribers to UPS.

A similar service was recently launched by UPS in Europe called Access Point.  UPS's expectation is that it will help boost the somewhat lackluster numbers out of the Eurozone as a result of the economic crises. 

Globally, European exports saw a small increase of 3%.  Meanwhile, Asian exports slowed and were up only 8%, as uncertainty over China's GDP and slower production growth tempered the previous euphoria.

UPS's global reach and scale makes them the only provider who can furnish all levels of service (express, ground, domestic, international, commercial, residential) through one integrated pickup and delivery system. 

However, many customers are shifting to the lower-priced ground services over the higher-priced express shipping options.  But the margins for ground delivery are not as rich as those for the premium services. 

That means any turn in consumer demand for the premium services will result in greater profitability and therefore is crucial for the company's continued success.

On the flip side, the customer preference for ground services is having more of a dramatic effect on rival FedEx.  Since UPS has a stronger domestic network, the company now has an opportunity to grab more market share from FedEx with its ground services.

In the meantime, UPS is doing the little things to keep costs down.  That includes the move to fuel more of its trucks with liquefied natural gas (LNG).

In all, UPS operates a ground fleet of approximately 101,000 vehicles. Of those only 1,000 are currently LNG powered. But UPS is expanding its LNG fleet trucks by another 700 and building fueling stations across the U.S. to accommodate long-haul deliveries. 

Once this expansion is actualized, UPS will own one of the largest LNG fleets in the U.S.  With the cost of natural gas 30% to 40% less than imported diesel, it's a good start towards significant savings in the future.

UPS is also looking to save on energy costs by changing the look of its aircraft.  Wing modifications on the redesigned planes will allow the company to save six million gallons of fuel each year, providing 4% fuel savings on each flight.

Growth in Healthcare Supply Chain Solutions

One area where the company is focusing its efforts -- and where it sees significant growth -- is the healthcare industry.

In fact, thanks to the company's Supply Chain Solutions, UPS is making big inroads into the healthcare field.

Here's why and what it means for investors...

With an increasingly older global population, the need for delivery of sensitive pharmaceuticals or equipment is becoming more and more commonplace.  In this area, UPS' ability to reach practically every corner of the earth meets the increasing demand in expediting and streamlining these types of deliveries.

To this end, UPS provides services such as the temperature-sensitive handling of packages, monitoring, labeling, and order management.  The company also helps healthcare manufacturers meet complex regulatory requirements that in many cases may be geographically specific.

UPS has also set up various healthcare-focused distribution facilities in strategic regions such as the U.S., Canada, Latin America, Australia, the Netherlands and Singapore. 

But that is just the beginning.

The company is also looking to build more facilities in the developing markets of China, India and Brazil, and is also in partnership with pharmaceutical giant Merck (NYSE: MRK) to push further into Asia and Latin America.

UPS has been very aggressive in this area - so much so that it recently acquired Cemelog, a medical logistics company in Hungary that serves Eastern and Central Europe.  

This acquisition will add another 255,000 square feet of dedicated healthcare distribution space for a total of 6.5 million globally.  

According to D. Scott Davis, UPS Chairman and CEO, the main attraction to this deal is that it helps to fully utilize the entire breadth of the company.

 "This acquisition is a continuation of our ongoing growth strategy across our business units," Davis said,   "It allows us to create innovative solutions for our customers that leverage UPS' global network."

Is UPS Getting Caught Up in the Market Updraft?

UPS generated more than $1.4 billion in free cash flow during the most recently reported quarter and it reaffirmed its full-year guidance earnings per share to be between $4.80 and $5.06.

The company also recently increased its dividend by 9%, and is paying a dividend yield of 2.8%.  It's also been buying back shares, and is on track to purchase $4 billion worth of stock by the end of 2013.


(Source: Yahoo Finance)

These results have spurred the stock price substantially higher.

With the S&P Index at all-time highs (up over 15% year to date), UPS has followed suit and is also pushing all-time highs

But by my estimation it is very possible that even with the sound UPS business model the stock price is getting ahead of itself.

That's why today isn't the day to buy UPS.

Investors need to remember that even though it is standing its ground amidst a shaky global economy, UPS is still very much subject to the retail customer and e-commerce.  So far, the boon in e-commerce has been its saving grace and by all indications it looks like there are still greener pastures ahead for it. 

But even if the viability of e-commerce has been laid to rest, investors should be asking: How long before the roaring stock market takes a pause?

When that pause eventually manifests, I will be a buyer of UPS with its fine business model and prospects for future growth.

But until then, if I had a position I would continue to HOLD.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, please leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

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