UNITED PARCEL SERVICE (UPS)
Investment Research Report

UPS:  A Major Force in eCommerce
Talk about a company that has seen it all, United Parcel Service has been around as long as the automobile.  Or in this case we should say, the delivery truck.  Founded in 1907, UPS is the biggest package delivery company worldwide.  Delivering loads of things to lots of places is just one part of the UPS value proposition.  They serve up a multitude of technology-driven logistics designed to create major cost savings for their corporate customers.  In a world of global trade, companies like UPS play a key role.

UPS groups it business into three segments based, for the most part, on location.  US Domestic Package is the big gun at 63% of revenues and 63% profits.  International contributes 21% and 28%.  The balance comes from UPS logistics solutions - where UPS cements it relationship with corporate customers.

And here is how UPS customer loyalty measured up in 2015:
• Forbes’ 2015 ranking of America’s Most Reputable Companies
• Interbrand’s Best Global Brands,
• Millward Brown's Most Valuable Global Brands

At the core of great reputations are great employee relations.  UPS has approximately 76,000 worldwide workers and has invested $110 million in the UPS Foundation that promotes community safety, diversity and environmental issues.  No wonder it all works so well.  UPS is just a good corporate citizen.

Ecommerce is Eating Traditional Retailers Alive
UPS’s ever evolving skills in logistics and position of leadership in the so-called “less-than-truckload” industry, places them in just the right spot to benefit from the explosion of online package delivery.  Just take a look at this fast-growing area.

Since the dawn of the consumer Internet, eCommerce has been growing at big double-digit rates, taking market share from old time traditional retailers.  In the beginning it was nothing more than a novelty for a few geeks.   These days eCommerce is no longer an arrogant little upstart.  Now it is a real threat.  

According to US Census Bureau, eCommerce accounts for nearly 10% of retail sales.  That totals $350 billion, gaining 15% in 2015.  UPS is on record forecasting this total will double by 2020.  That growth rate is huge.  Online purchases have now reached the tipping point.  Major retailers are feeling the pinch.  New strategies are emerging.  Last year for the first time a major discount retailer, Kohl’s announced a series of store closings as more of their business moved online.  Traditional retailers like Kohl’s and Target are reaching out to sell to mobile customers.

There are a host of reasons why eCommerce will remain the fastest growing part of the US consumer economy.   Convenience tops the list.  Mainstream consumers have adapted to the virtual shopping world.  Buyers are offered increasingly rapid delivery.  Ecommerce companies have made it easy to return products.  Finally customized Apps allow customers to compare prices and find bargains online with little effort.  That is a big head of steam.

Competition
UPS may be the world’s largest package shipping company but not the only.  Federal Express and the United States Postal Service are noble participants in the battle.  There are also numerous regional and local delivery companies that play a role.  

And then there is Amazon.  Long time major engine of change, Amazon is the biggest US eCommerce store.  In addition, it owns a French based package shipper and has made much news recently about having it own delivery fleet of drones.  All this has led to speculation that Amazon’s presence alone will lay waste to all other participants in the small package home delivery business.  UPS and The Bull Market Report are not worried.  This is not Amazon’s business.  Delivering these packages IS UPS’s business.

The real battle is among the big three with each using price, speed and convenience as their weapons.  In this environment, UPS has dedicated itself to using technology to its advantage and we believe it will retain the #1 position.  Price, speed and convenience may be the weapons but technology is the silver bullet.

As for Amazon, their long-term objectives are far from clear, but currently their delivery targets appear to be limited to locations in close proximity to major distribution centers.  In the meantime, Amazon is one UPS’s biggest customers.

UPS Loaded With Silver Bullets
In order to meet the demand and ensure successful operations, the key is having full service during peak holiday season traffic.  To be ready for the rush, UPS invested over $1 billion in facility expansions and equipment modernization since 2014.  Here is how UPS aims to increase it share of the eCommerce business.  If it all sounds like the nuts and bolts of how to take a rock solid company and make it better, you are absolutely right.

• Cyber Week: Increasing ground and air pickup and delivery on Black Friday.
• Adding weekend pickup and delivery operations to smooth geographical volume spikes.
• Significantly expanding delivery fleet.  
• Automating facilities to expand existing capabilities through enhanced technology.
• Updating the UPS website and expanding UPS communications to enhance the timeliness and relevance of alerts when service disruptions occur.

More eCommerce in The Mix Equals Faster Growth
It is easy to overlook both the impact and outlook eCommerce shipping holds for UPS.  It grew up in a time of heavy focus on global wholesale and industrial trade rather than smaller residential customers.  Thus its revenue naturally reads like a United Nations report on global commerce.  However, if UPS forecasts are on the mark, the total eCommerce will hit 20% by the end of the present decade.  As the industry leader, that should translate into far more of the revenue mix at UPS

Recent Performance
Over the past three years revenues have increased an average of 3% and per share profits by 8%.  Nothing to be ashamed of, but the numbers hide several important facts.
                United Parcel Service    
           Year Ending December 31st
                           (In millions)              
                             2015        2014         2013
Revenues        $58,000   $58,000     $55,000         
Net Income      $4,800      $3,000        $4,400
EPS                         $5.35        $3.28       $4.61
      
First off, the strengthening US dollar left reported International revenues unchanged over this period.  Local currency revenues were far better but that’s true for virtually all American multinational companies.  It is just something we have to live with.  However, US Package Delivery revenues and profits increased 3%.  Global eCommerce-related deliveries increased closer to 20%.  To us, one thing is clear: It’s only a matter of time before it starts to step up the company’s overall growth.  

Wall Street Is Smiling on UPS
They are breaking out the brown on Wall Street.  The UPS brown that is.  The consensus this year calls for revenue gains of 6% to $62 billion and a 5% advance in profits of 5% to $5.80 per share.  Looking out to 2017 the forecast is for a solid 5% increase in revenues to $64 billion and earnings up 8% to $6.25.  As we said, growth is picking up, a good investment outlook for any company.

Financial Strength
For a company in the transportation business where loads of fixed costs are common, UPS is surprisingly liquid.  The balance sheet shows just under $5 billion in cash and $14 billion in long-term debt.  It’s good to know that the $1 billion in capital spending over the past year has been accomplished without the least bit of deterioration in balance sheet strength.

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