The Bears Are Wrong on UPS Stock
United Parcel Service, Inc. (NYSE:UPS) showed a strong year-over-year recovery in the last quarter, which the company announced last February. Since then, UPS stock has risen 6.3%, increasing from about $95.00 to $105.00 per share. The company’s earnings-per-share (EPS) growth represented the most notable improvement: $5.34 versus $3.28 in 2015.
UPS stock dropped to its lowest price since 2013 last January, hitting $89.00. Just like its rival Federal Express, UPS has suffered from speculation that the online retail giant Amazon.com intends to establish its own air cargo network. It would be able to deliver its packages faster within the United States.
Well, at least in theory. In practice, UPS will retain significant market share and UPS stock has a bullish year ahead. Five Wall Street firms have rated the stock as a “Strong Buy,” while 10 others have urged their customer to hold UPS. The target price is $110.00, well within reach given the stock’s current bullish phase. The most bullish analyst has set a price target of $126.00, which implies a gain of 24%. (Source: “United Parcel Service (UPS) Analysts Recommendations and Insider Trading,” Zerg Watch, March 17, 2016.)
Confirming the rumors, Amazon.com announced a few weeks ago that it will lease 20 Boeing cargo planes and set up its own parcel delivery network to help fulfil its goal of delivering parcels within one or two days in the United States. Amazon made no secret of its intention to create its own air cargo network to reduce its reliance on third-parties for package deliveries. Boeing aircraft leasing costs aside, Amazon said it would also reduce costs.
For the time being, Amazon relies on specialized companies, such as UPS, for the bulk of its deliveries, for which it spent $11.5 billion (10.45 billion euros) last year. (Source: “Amazon Air is ready for take off! Shopping giant leases 20 Boeing 767 cargo planes to speed up deliveries,” Daily Mail, March 9, 2016.)
However, the fallout from the Amazon decision for these two companies should be limited at best. Some analysts, like John Barnes at RBC Capital Markets, said that Amazon’s self-delivery service would eventually deprive UPS and FedEx of volumes, affecting earnings. Yet UPS alone has a fleet of some 240 aircraft. FedEx has 100 more. Both have networks all over the world; and not just large planes, but medium and small ones, trucks, vans, and physical infrastructure to coordinate global shipping and logistics.
Therefore, it is premature to suggest that Amazon’s shipping network would alter the logistic and transport sector. At best, the online giant can fix some issues in the North American network.
Amazon also promised delivery by drone, but it did not say when it expected to use this service.
Meanwhile, UPS announced plans to invest some $80.0 million to expand one of its major EU sorting and package delivery facilities, located in Herne in the Ruhr region of Germany. The proposed $80.0-million facility, which should be completed by the end of 2017, will more than double the size and capacity of the company’s sorting center. By undertaking this project, UPS has confirmed its long-term confidence about delivering all sizes of packages.
Closer to home, UPS is aiming straight for Amazon, as it expands its “UPS Next Day Air Early,” its earliest small-package delivery service, adding 12,680 more ZIP codes. (Source: “UPS Adds More Than 12,000 Zip Codes to Earliest Delivery Service,” Econo Times, March 21, 2015.)
The service addition means that UPS can now ensure earlier guaranteed-delivery options for addresses located in areas that, until now, were served only by end-of-day guarantees. The UPS Next Day Air Early service now reaches 94% of ZIP codes and 98% of businesses in the U.S. with the expansion.
UPS is already able to deliver packages to a greater number of ZIP codes between 8:00 a.m. and 10:30 a.m. than its competitors. Saturday service is also available to certain destinations.