Despite the approach of the summer doldrums in the equity market, bullish investors still believe that the American economy is improving. For shrewd investors, United Parcel Services (UPS: Charts, News, Offers) offers an infrastructure play on an improving economic environment. UPS is the world’s largest express delivery company, with 74% of its revenues generated by domestic businesses. As trade improves, shipping volume will increase across all sectors, and UPS is well positioned to reap the rewards. In addition, the rise of e-commerce in favor of brick and mortar retail is highly favorable for the company. Although UPS is a cyclical stock, its market dominance and flexible revenue stream makes it an ideal choice for conservative investors.
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Retail e-commerce sales in the United States increased to $165 billion in 2010 – a 7% gain in brick and mortar and 14.8% gain in e-commerce sales over the previous year. Although companies are increasing their e-commerce initiatives, due to the success of eBay (EBAY: Charts, News, Offers) and Amazon (AMZN: Charts, News, Offers), these numbers only comprise 4.2% of total retail sales. With the increasing penetration of the Internet worldwide, there is massive growth potential for e-commerce, which will benefit UPS’ shipping business greatly. UPS currently handles over 50% of online goods purchases within the United States.
UPS is also committed to maximizing shareholder value. The company plans to repurchase $2 billion in shares throughout 2011, which continues its string of buybacks since 2010. By the end of 2011, UPS will have reduced its outstanding shares by 27 million shares, increasing its yearly EPS by 10 cents, or 2.8%. The lingering concern for current UPS shareholders is the looming specter of rising oil prices. Although the company’s bottom line will be impacted by rising oil prices in air and truck freight. Due to its market dominance, however, UPS passes these costs on to customers through fuel surcharges, and has done so without reducing sales volume. Although there many be dark days ahead, especially with a new Japanese recession starting, UPS may pay off for patient, long term investors.
UPS, which delivers nearly a billion packages quarterly, was selected as the “World’s Most Admired” company in its industry by Fortune magazine, an honor recently bestowed on the likes of market makers Apple (AAPL: Charts, News, Offers) and Google (GOOG: Charts, News, Offers). The company was recognized by its good reputation, product quality, continuing innovation and long-term investment value. At the end of April, the company announced diluted earnings per share of 88 cents, a 24% increase over the same period last year. Global revenue increased by 7.3%, and operating profit increased by 21% to $1.4 billion. The company also increased its guidance for 2011 earnings to $4.15-$4.40 per share, which would be a 17-24% increase over fiscal 2010 results.
Looking forward, UPS only faces three major competitors – Deutsche Post AG, the United States Parcel Service and FedEx (FDX: Charts, News, Offers). Deutsche Post is better known as DHL, which is a dominant force in the global market, which UPS still has a limited presence. Although based in Germany, the company has extensive global operations throughout most developed nations. The United States Parcel Service is an independent government agency, which has a monopoly on regular mail delivery, but faces stiff competition in the express delivery segment. FedEx, which offers the same services as UPS, is the company’s biggest threat, as it has extensive domestic and global operations and offers the same delivery services as the latter.
As the sell it May and go away dip approaches, investors seeking defensive, dividend-paying stocks might consider UPS. It’s by no means an exciting stock to own, but its forward P/E of 14.85 and its quarterly dividend of 52 cents per share make it a stable hedge for your portfolio in uncertain times, and if a global recovery picks up anew, then expect UPS to receive a boost into a higher trading range.
Other News About UPS
UPS: Dual Motives for Investing
Two reasons to invest in UPS.
UPS backs carbon tax, with conditions
UPS makes concessions with the government.
Other Stocks in the News
FedEx CEO: “Addiction” to Foreign Oil is Costing the Economy, American Lives
FedEx chief speaks up against American foreign policy.
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Does Google have a viable competitor to iTunes?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
