Can UPS' Global Domination Continue?
Can UPS' Global Domination Continue? (UPS)
Navjot Kaur
April 11, 2012
United Parcel Service (NYSE: UPS) is the world's largest package delivery company. But it's not invincible. The question before us today is: Can UPS overcome its weaknesses and emerge as the investors' company of choice? Let's put UPS under the scanner and identify its strengths, weaknesses, opportunities, and threats.
Strengths
Courier king: UPS operates on a massive scale, with more than 2,800 operating facilities all over the world. In 2011, the company generated revenue of $53 billion, 7.2% higher than the previous year.
Rapid inorganic growth: UPS has a penchant for acquisitions, which has helped the company expand its overseas presence and also added to its coffers. In a $6.8 billion deal, UPS recently acquired TNT Express, a Dutch package delivery company, to expand its presence in Europe and also consolidate its business in Brazil and in China.
Thick margins: UPS is not just a revenue grabber; it is also efficient in converting its sales into profits. This is evidenced by the fact that unlike rival FedEx (NYSE: FDX ) , whose low net income margin stands at 4.8%, UPS' net income margin stands tall at 7.2%.
Weaknesses
Heavy debt load: Although UPS operates efficiently, the company is burdened with a heavy debt load. At the end of 2011, its debt-to-equity ratio stood at an alarming 157%. Even though the company earns 17 times its interest expenses and has sufficient funds to cover them, it should take steps to manage its debt situation.
Barometer of the economy: UPS is highly dependent on the nature of the economy, which means factors such as recession, unemployment, and steep fuel costs translate into hard times for UPS.
Opportunities
Looking east: Emerging Asian nations, such as India and China, still have a considerably low penetration of package delivery services, making them the perfect regions for potential acquisitions by the company.
Online shopping: The recent boom in online shopping also means that an increasing number of people will require shipping services, which should translate into a very potent source of revenue for companies such as UPS. Online shopping giants Amazon and eBay regularly use its services to reach out to their customers.
Threats
Spiraling fuel costs: UPS has to contend with rising fuel costs that hurt margins and pinch profitability. In 2011, the company's revenue grew by 7% while fuel expenses surged by a staggering 36%.
China challenge: Despite being a highly lucrative area of expansion for most organizations, including UPS, the recent slowdown in China's economy continues to be a source of concern. UPS' actual performance may not live up to its expectations in that region, but this story has yet to play out.
The Foolish takeaway
UPS has strong fundamentals, a broad market, and strategic acquisitions working in its favor. However, the company must not neglect its debt burden. I would keep an eye open for the company's quarterly results, which are expected to come out at the end of this month. Keep a close watch on the parcel carrier by adding it to your watchlist.