Friday, October 28, 2011

United Parcel Service (UPS)

The largest delivery company in the world. It is still quite dependent on the US: 60% of revenue and 57% of profit came from domestic operations in 2010.

Their segmental results are broken down into:
- US Domestic (ground delivery of letters or packages, both sending and receiving in the US)
- International Package
- Supply chain and Freight (Truckload (TL) and less-than-truckload (LTL) deliveries) - in the US and surrounding countries)

Competitive Advantage

DHL wrote off 3.9bn when it exited the US domestic market in 2009. Fedex and UPS are the only 2 large players left, and are compared below.

First, market share. UPS has larger (about 80% more) revenue for US deliveries. They both have similar revenues for International.
'International' here means the package was sent to *or* from the US.

Next, margins. This is difficult because both companies break down their segments differently. Fedex breaks down their margins into 'Express' vs 'Ground' (disregards if the packages are domestic or international):
We can see that:
  • Ground handling has a lot higher margins than express.
  • Express margins are more cyclical: were worse hit by the 2009 recession, due to falling revenue (Express fell 8% from 08 to 09, vs a 4% increase for Ground).
UPS breaks up their segments differently. Each of their 'Domestic' and 'Intl' segments is a combination of express and ground. Their 'Domestic' was an even mix of express/ground in 2010. Express has made up a larger and larger proportion of the mix since 2007.

We can't compare directly to Fedex due to the segment differences.

UPS has significantly higher margins overall. Morningstar says this is probably because of 1) their integrated network (same network used for both express and ground delivery, unlike Fedex, which uses separate networks), and 2) more mail being funneled through the network.

CashFlow

For the last 10 years, from 2001 onwards, UPS has generated free cashflows all except one year.

Balance Sheet

Long term debt on their 2010 balance sheet is minimal (about 10b), together with some others (e.g.: post-retierment benefits), totals about 18b. Thats about 5-6 times their 2010 income (3.4b).

Off the balance sheet: they have another 3bn operating leases and purchase commitments (included in income statement), plus 2.5bn capital lease (not in income statement). All spread out over the next 10 years.


Industry Outlook

Depends on trade (national and international).

In the short term, this depends on the economic cycle.

In the long term, international trade has been increasing since WWII. It would take drastic scenarios for trade to go down (e.g.: trade war, rise of additive manufacturing - a possibility explored by DHL).

Conclusion

Company with a large moat. Half US, half international. Highly cyclical. Buy in a recession.

2 comments:

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UPS sounds good.