Post on 11-Jul-2018
UNITEDPARCELSERVICEANALYSTREPORT
2016-2017UConnStudentManagedFund
StevenGaspariniandJoeCotton
TABLEOFCONTENTS
ReportHighlights...............................................................................................................................1BasisforRecommendation.......................................................................................................................1BusinessDescription...................................................................................................................................1
IndustryOverviewandTrends.....................................................................................................2IndustryOverview........................................................................................................................................2GrowthofE-Commerce...............................................................................................................................2ExpansionofGlobalTrade.........................................................................................................................2ShifttoAutomatedDeliverySystems.....................................................................................................3GreaterFuelEfficiency................................................................................................................................3
InvestmentThesis.............................................................................................................................3Thesis................................................................................................................................................................3E-CommerceandAmazonPartnership.................................................................................................3HealthcareLogistics.....................................................................................................................................4ORION...............................................................................................................................................................5
Financials.............................................................................................................................................5ConsistentRevenueandProfitGrowth..................................................................................................5HealthyFinancialPicture...........................................................................................................................6CommitmenttoMaximizingShareholderReturn..............................................................................6
Valuation...............................................................................................................................................6DiscountedCashFlowModel(50%weight)........................................................................................6DividendDiscountModel(50%weight)...............................................................................................7
RiskstoInvestmentThesis.............................................................................................................7RisingFuelPrices..........................................................................................................................................7EconomicConditions:DomesticandAbroad......................................................................................7ProtectionistTradePolicies......................................................................................................................8
Conclusion............................................................................................................................................8
Appendices..........................................................................................................................................9
Page1
ReportHighlights
UnitedParcelService,Inc.(NYSE:UPS)Sector:Industrials
CurrentPrice PriceTarget 52-WeekHigh 52-WeekLow P/E MarketCap. Recommendation
$104.99 $129.47 $120.44 $100.05 27.25x $91.21B Buy
BasisforRecommendaHon
WerecommendaBuyratingforUPSbasedonapricetargetof$129.47pershare,offeringa23.3%marginofsafetyoverthe
closingpriceof$104.99pershareasofApril7,2017.Our
recommendationisprimarilydrivenbythreefactors:
1.Highbarrierstoentrywithintheindustry–UPSmaintainsanindustryleading57%marketshareinthedomesticcourierand
deliveryservicesspaceoveritstwomaincompetitors,FedExand
USPS.
2.Growthofe-commerceandhealthcarelogistics–UPSispositionedtoexperienceincreasedrevenuegrowthfromthesurge
ine-commercebothdomesticallyandinternationally.Likewise,its
recentpushintothehealthcarelogisticsspacethroughacquisitions
willenableittocapitalizefromthegrowingglobalbiopharma
industry.
3.Costefficienttechnologicalcapabilities–UPS’sORIONlogisticstechnologywillcontinuetoreducecosts,increasemargins,
andenlargeitslogisticssolutionsbusinessexposurethroughits
SupplyChainandFreightsegments.
BusinessDescripHon
UPSistheworld’slargestpackagedeliverycompany,aleaderinthe
U.S.less-than-truckloadindustry,andthepremierproviderof
globalsupplychainmanagementsolutions.UPSdeliverspackages
eachbusinessdayfor1.6millionshippingcustomersto8.7million
receiversinover220countriesandterritories.In2016,the
companydeliveredanaverageof19.1millionpackagesperday,or
atotalof4.9billionpackagesthroughouttheyear.Totalrevenuein
2016was$60.9B.Revenuebreakdownbasedonpercentof
revenuein2016isshowninFigure3.UPSalsoservestheglobal
marketforlogisticsservices,whichincludetransportation,
distribution,contractlogistics,groundfreight,oceanfreight,air
freight,customsbrokerage,insurance,andfinancing.
0.00%
20.00%
40.00%
60.00%
80.00%
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Figure1:UPSvs.SPYReturn
UPS SPY
Figure2:UPSMarketShare
Figure3:UPSRevenuebySegment
Page2
IndustryOverviewandTrends
IndustryOverview
Thedomesticcourieranddeliveryservicesindustryisprimarily
composedofthreemajorfirms:UPS,FedEx,andtheUnitedStates
PostalService(USPS).UPSspecializesinfreightandground
shippingwithafleetof240aircraftand114,000groundvehicles.
FedExspecializesinnext-dayairservicedeliverieswithafleetof
650aircraftand50,000groundvehicles.TheUSPSspecializesin
residentialmailandsmallpackagedeliveryanddonotownanyof
theirownaircraft,choosingtocontractcommercialaircraft.USPS
ownsagroundfleetof211,000vehicles.AsshowninFigure2,UPS
dominatestheindustrywith57%marketsharewithFedEx
securing~25%ofthemarket.SeeFigure4foraUPSandFedEx
comparison.
GrowthofE-Commerce
Thecourierindustryishighlycorrelatedtothee-commerce
industry.From2015-2016,domesticonlineshoppingincreasedby
15.6%from$341Bto$395B(Mintel).Thegrowthinthedomestic
e-commerceindustryisprojectedtocontinuetogrowatanaverage
annualrateof15%toamarketof$600Bby2020.Globale-
commercesalesarepoisedtogrow112%overthenextfouryears
toa$4trillionmarket(Statista).UPShasrecognizedthegrowthin
thisindustryandannouncedthepurchaseof14Boeing747-8
jumbofreightersinQ3of2016tosupplementitsexistingcapacity
foroverseasdelivery.Thecompanyalsooperatesfacilitiesinover
220countriestoaccompanytheincreaseddemand.
ExpansionofGlobalTrade
UPShasbeencommittedtoexpandinginbothdevelopedand
emergingmarkets.Overthenexttenyears,emergingmarketsare
expectedtocontributetomuchofglobalGDPgrowthandan
increasingportionofglobaltrade.Totakeadvantageofthese
opportunities,UPShasmadelong-terminvestmentsinChina,
Poland,andTurkey,withfacilitiesinWarsawandIstanbul,coupled
withairhubsinShanghai,Shenzhen,andHongKong.Theaddition
of14Boeing747-8stoitsfleetwillhelpitservetheemerging
marketsofIndia,LatinAmerica,Africa,EasternEurope,andparts
oftheMiddleEast.UPSplaysanimportantroleinbothglobaland
regionaltradeandiswellpositionedtotakeadvantageoftrade
growth,whereveritoccurs.Thecompany'sglobalpresenceand
productivitybyenhancingtechnologieshavealloweditscustomer
basetoefficientlyexpand,leadingtonewmarketsand
opportunities.
Market
Cap.Revenue
(2016)Net
Income
(2016)
P/E Packages
Delivered
DailyUPS $91.2B $61B $3.4B 27.3x 19.1M
FedEx $52.3B $50B $1.8B 27.7x 3.4M
Figure5:GlobalE-CommerceGrowth
Figure4:UPSandFedExComparison
Figure6:UPSGlobalDeliveryGrowth
The15developedandemerging
marketswe’veprioritizedofferbetween
$80Band$90Binopportunityacrossall
ourbusinessunits.
~UPSCEODavidAbney
Page3
ShiRtoAutomatedDeliverySystems
UPShasacknowledgedtheemergenceofautonomousdrivingand
relateddeliverysystems.Eachoftheir2,600Class8deliverytrucks
havealreadybeenequippedwithfullcollisionavoidancesystemsto
alertdriversofobstaclesonallsidesofthevehicle.Likewise,on
February21,2017UPSunveileditsdronepackagedeliverysystem
thatwillbeginaccompanyingallvehiclesinthesummerof2017,
allowingmultiplepackagestobedeliveredsimultaneouslyin
remotelocations(bybothdriveranddrone).
GreaterFuelEfficiency
8,100ofUPS’sdeliveryvehiclesrunonalternativefuelsources,
suchaselectricandnaturalgas.Thecompanyhasalsocreatedan
algorithminitsORION(On-RoadIntegratedOptimizationand
Navigation)systemthatreducestheamountof“right-hand”turnsa
drivermakesoverthecourseofdelivery.Thecompanystatesthat
thistechnologyhassaved10milliongallonsoffuelayearandhas
reducedCO2outputbyover100,000metrictons(theequivalentof
21,000cars).TheseresourcesshowthatUPShasmadeaconscious
efforttoadapttoamoreself-reliantenergytrendandhas
positioneditselftosucceedinanenvironmental-sustainingway.
InvestmentThesis
Thesis
UPSisbestpositionedintheindustrytosucceedfromsignificant
growthinthee-commerceindustrythroughtheirstrategic
partnershipwithAmazonandtechnologicalresources.Likewise,
thecompany’sacquisitionsinthehealthcarelogisticsspaceprovide
significantgrowthopportunitiesinanexpandingindustry.Lastly,
UPS’sfullrolloutoftheirORIONsystemwillincreaseUPS’s
operatingmarginsbyreducingcostsandexpenses.
E-CommerceandAmazonPartnership
Asaforementioned,thetrendofe-commercehasincreasedthe
demandforshippingservicesglobally.UPShasalreadybegunto
capitalizefromanincreasingvolumeinshipping.Business-to-
consumershipments,whichrepresentedmorethan48%oftotal
U.S.DomesticPackagevolumein2016,grewnearly9%fortheyear
and11.5%inthefourthquarter,whichdroveincreasesinbothair
andgroundshipments.Likewise,NextDayAirvolumeincreased
5.2%in2016duetostronggrowthine-commerce.
Figure7:UPSDroneDeliverySystem
Figure8:UPSFuelEfficiencyMetrics
BUY
E-Commerce
Healthcare
Logistics
ORION
Figure9:UPSInvestmentThesis
Figure10:B2CMixExpectedtoClimb
Page4
Toaccommodatetheriseinparcelshippingasaresultoftheboom
ine-commerce,UPShasdevelopedtheproperresources.The
companyofferscost-effectivesolutionssuchasUPSSurePost,for
U.S.domesticshipments,andUPSi-parcelforalow-costdeferred
crossbordersolution.Theyalsooffercustomizablesolutions,such
asUPSMyChoice,aservicethatprovidesmorethan32million
memberswithvisibilityandcontroloftheirinboundshipments.
ThescopeofUPSMyChoicehasbeenenhancedoverthepastyear
withtheadditionofUPSFollowMyDeliveryfortime-sensitive
shipments.Thisserviceoffersmap-basedtrackingfromapackage's
deliverydeparturetoaUPSMyChoicemember'sresidence.
UPSMyChoicemembershavetheaddedflexibilitytodirect
packagestoUPSAccessPointlocationswhentheywillnotbehome
toacceptadelivery.UPSAccessPointlocationsareconvenient
places–suchasTheUPSStoreandotherlocalbusinesses–that
offereasypackagedrop-offandpick-up.Witheveningandweekend
hours,UPSAccessPointlocationsbetterfitsomeconsumers’
schedules.Merchantsin50countriesandterritoriescanalready
shipdirectlytoUPSAccessPointlocations,givinginternational
merchantsandconsumersgreatercontroloverpackagedeliveries.
UPS’srelationshipwithe-commercegiantAmazon.com,Inc.hasled
toUPShandlingabout30%ofAmazon’s600millionpackages
withintheUnitedStates(oranestimated$1BinrevenuetoUPSa
year).Thisvolumehasgrown500%overthepast10yearsandis
poisedtocontinuetogrowgiventhegrowthprospectsofboth
Amazonandonlineshopping.
HealthcareLogisHcs
UPShasrecentlybeenpushingintohealthcarelogistics,recognizing
theincreaseddemandforhealthcareservices.Thecontinuous
advancesinmedicine,alongwithanagingworldpopulation,
createsaneedforlogisticspartnerswhocanprovidespecialized
temperature,chain-of-custody,andspeed-in-transitthattoday’s
healthcarecompaniesrequire.Withglobalbiopharmasales
projectedtogrow41%through2020(Figure14),thehealthcare
shippinglogisticsindustryispoisedtodirectlybenefitUPS.In
2016,UPSexpandeditshealthcarecapabilitiesbyacquiring
Marken,aglobalproviderofsupplychainsolutionstothelife
sciencesindustry,primarilyservingtheclinicaltrialslogistics
space.Clinicaltrialsaresubjecttostrictregulatorycompliance
(certifiedbytheFDA),requiretemperature-controlledlogistics
services,andaretypicallyglobalinreach.Markenoperatesaglobal
networkofclinicalsupplychainservicestomeettheincreasingly
complexdemandsofitsclients.TheacquisitiondoublesUPS’s
healthcarededicatedfacilitiestoover100andexpandsits
healthcarelogisticsservicesportfolio.
Figure13:UPSDeliversAmazonParcels
Figure11:GrowthofOnlineRetail
Figure12:UPSMyChoice
Figure14:GlobalBiopharmaSalesTrend
Page5
ORION UPScompletedPhase1ofdeploymentofitsOn-RoadIntegrated
OptimizationandNavigation(ORION)systemin2016andplanson
havingitfullyimplementedby2019.ORIONusesexpansivefleet
telematicsandadvancedalgorithmstogatherandcalculate
countlessamountsofdatatoprovideUPSdriverswithoptimized
routes.ThetechnologyhelpsUPSdriverstodeterminetheoptimal
waytodeliverandpick-uppackageswithinasetofstopsdefinedby
starttime,committime,pick-upwindows,andspecialcustomer
needs.
ORIONsavedthecompany$400millionin2016andgenerated
NPVofmorethan$700million.Goingforward,thecompany
expectssavingsof$300-400millionannuallyfromORION’s
implementation,boostingoperatingmarginsandbendingthecost
curve(Figure15).Thereductioninmilesdrivenisalsoexpectedto
cutgreenhousegasemissionsby100,000metrictonsannually.
ORION’stechnologyadvancesalsosupplyUPSwiththeabilityto
efficientlyroutecustomersofitslogisticsbusinesses,givingita
competitiveadvantageoverFedExandotherlogisticspecialist
companies.
Financials
ConsistentRevenueandProfitGrowth
Overall,UPShasmaintainedahealthyfinancialpicture,andwe
expectthisstronggrowthtocontinuegoingforward.UPS’s
revenueshavegrownsteadilyoverthepastfiveyears,whilenet
incomehasremainedrelativelystableonanadjustedbasis.TheU.S.
Domesticsegmentin2016producedsolidrevenuegrowthof4.2%
overtheprioryear,whiletheSupplyChainandFreightsegment
experiencedevenstrongerrevenuegrowthof8.3%YoY.
Meanwhile,robustexportshipmentgrowthof5.1%wasthe
primarycontributortototalInternationaldailyshipmentsrising
4.4%.
Thecompanyexpectsrevenuestoreach$64billionin2017with
hopesofreaching$70billionby2020.Meanwhile,profitsgrew4%
in2016overthepreviousyearduetocostsavingsfromORIONand
top-linerevenuegrowth.Asourinvestmentthesisplaysoutand
UPScontinuestodeliverforcustomers,investorsshouldcontinue
toseestrongrevenueandprofitperformance.
Figure15:UPSCostCurve
Figure16:UPSOperatingMargin
Figure17:UPSRevenueGrowth
Figure18:UPSNetIncome
Page6
HealthyFinancialPicture
UPS’searningspictureisstrong,asevidencedbyitsindustry
leadingfinancialratiosandmetrics.UPShasconsistently
outperformeditsmaincompetitor,FedEx,inprofitability.Its8.72%
returnonassetsand238.68%returnonequityfigureshighlight
management’sabilitytoselectprofitableinvestmentopportunities,
suchastheresearchanddevelopmentplacedintotheirORION
system.Meanwhile,operatingandnetprofitmarginsof8.98%and
8.43%,respectively,emphasizethecompany’sfocusonbendingthe
costcurvewhilegrowingrevenues.
CommitmenttoMaximizingShareholderReturn UPShasalonghistoryofsharebuybacksandhasincreasedits
dividendfor16consecutiveyearswitha3-yearannualizedgrowth
rateof8.0%.Currently,itsdividendyieldis3.16%,whichis61%
higherthantheS&P500averagedividendyieldof1.96%.Since
2011,UPShasboughtback$16.2billionworthofshares.In2016,
adjusteddilutedEPSincreased6%to$5.75,anall-timehigh,while
thecompanyreturnedover100%ofnetincometoshareownersby
paying$2.8billionindividendsandrepurchasing$2.7billionin
shares.Therefore,itisevidentthatUPSwillreturnasignificant
amountofcashtoshareholdersinthefuture,whetherthrough
sharerepurchasesordividendincreases.
Valuation
DiscountedCashFlowModel(50%weight)OurDCFassumptionsincludeashort-termrevenuegrowthrateof
3.3%,aterminalfreecashflowgrowthrateof2.5%,andaWACCof
6.0%.WebasedourrevenuegrowthrateontheaverageofUPS’s
growthoverthepast5years,aswellasmanagement’sprojections
forthefuture.Likewise,wefactoredintheanticipatedgrowthofe-
commerceandhealthcarelogistics,andultimatelybelieveour3.3%
growthrateisrelativelyconservative.Theassumed2.5%terminal
growthisreflectiveoftheU.S.long-termGDPgrowthrate.Our
WACCof6.0%wascalculatedusingdataprovidedbyBloomberg,in
additiontotheCapitalAssetPricingModeltoaccuratelyestimate
costofequity.
Wearrivedatapersharevalueof$129.81,whichweweightedat
50%ofourtargetprice.OurfullDCFmodel,includingasensitivity
analysis,canbefoundinAppendixG.
Model Price Weight
DCF $129.81 50%
DDM $129.12 50%
TargetPrice $129.47
CurrentPrice $104.99
MarginofSafety 23.3%
DCFAssumptions ShortTermGrowthRate 3.3%
TerminalGrowthRate 2.5%
WACC 6.0%
Figure20:UPSDividendsPerShare
Figure21:ValuationSummary
Figure19:FinancialMetrics
Figure22:DCFModel
Page7
DividendDiscountModel(50%weight)
OurDDMassumptionsincludedthesameterminalgrowthrateof
2.5%,aswellasaWACCof6.0%.Ourfuturedividendspaidgrowth
rateof6.1%wascalculatedasahistoricalaverageratefrom2007-
2015.However,wegraduallywalkedthisnumberdownto5%over
the10-yearprojectedperiodtoreflectthecompany’sexpected
maturation.Wealsoassumedthecompanywouldcontinueits
historicaltrendofrepurchasing2%ofitsshareseachyear.We
arrivedatapersharevalueof$129.12,whichweweightedat50%
ofourtargetprice.OurfullDDMmodel,includingasensitivity
analysis,canbefoundinAppendixH.
RiskstoInvestmentThesis
RisingFuelPricesUPSisexposedtochangesinthepriceofgasoline,diesel,andjet
fuel,astheseenergysourcesfuelUPS’sgroundandairfleets.
Therefore,higherfuelcostscouldadverselyimpactUPS’soperating
results.However,tomitigatetheirexposuretochangingfuelprices,
thecompanyentersintohedgingtransactionstolockincurrentoil
pricesandreducevariability.Withoiltradingnearitslowestprices
inyears,UPShasbeenabletoreduceitscostofoperationsand
employhedgingstrategiestotakeadvantageoftheoilsupplyglut.
However,evenifoilpricesbegintorise,webelieveUPS’seffortsto
transformitsgroundfleetfromonedependentongasolineand
dieseltoafleetthatismorereliantonalternativeenergysources
willhelplessentheimpactofrisingprices.
EconomicCondiHons:DomesHcandAbroad
UPSconductsoperationsinover220countriesandterritories.Its
U.S.andinternationaloperationsaresubjecttonormalbusiness
cyclesaffectingtheeconomyingeneral.Sincethefactorsthat
createcyclicalchangestotheeconomyandtoUPS’sbusinessare
beyonditscontrol,itmaybedifficulttomitigatetheimpactofthese
factors.Inparticular,UPS’sbusinessisaffectedbylevelsof
industrialproduction,consumerspending,andretailactivity.
Internationally,theUnitedKingdom’svotetoleavetheEuropean
Unioncouldalsoresultineconomicuncertaintyandinstability,
resultinginfewergoodsbeingtransportedglobally.However,we
believethatthecurrentTrumpadministration’spro-growth
policies,particularlythosefocusedonincreasedinfrastructure
spendingandtaxcutswillallowUPStotransportgoodsmore
efficiently,aswellasboostdomesticGDPandconsumerspending.
DDMAssumptions
TerminalGrowthRate 2.5%
WACC 6.0%
DividendGrowthRate 6.1%-5.0%
ShareRepurchaseRate 2.0%
Figure23:DDMModel
Figure24:OilPricesSince2012
Figure25:GDPGrowthSince2006
Page8
ProtecHonistTradePoliciesUPScurrentlyderives21%ofitsrevenuesfrominternationalmarketsandhasmadelongterminvestmentsto
accommodatethegrowthinthesemarkets,suchaspackagesortingfacilitiesandincreasingitsairfleet.Thus,
freeglobaltradeisvitaltoUPS’sbusiness.Withthepotentialforprotectionisttradepoliciesdomesticallyand
globally(Brexit),UPSmayfaceanincreasedcostintransportingcross-border.However,UPSstilloperatesmainly
intheUnitedStates(whichcomprises79%ofitsrevenues)andmaintainsageographicaldiversityofits
internationaloperationstoensurethatthecompanyisnotoverlyreliantonasingleforeignregionorcountry.
Conclusion
Inconclusion,wereiterateourBuy ratingofUPSwithapricetargetof$129.47pershare,whichprovidesa23.3%marginofsafetyover
itscurrentpriceof$104.99.UPSispoisedtoprovideastrong
returnforinvestorsoverthenext10yearsduetoitsleading
positionintheparceldeliveryandcourierindustry,whichithopes
togrowgiventhecompany’slong-terminvestmentsmadeabroad.
Likewise,webelievee-commerceandhealthcarelogisticsprovide
UPSwithmanyopportunitiestogrowrevenuesandcapitalizeon
shiftsdrivenbytechnology.Lastly,UPS’sabilitytorecognize
changesindeliveryautomationandfuelindependencebyinvesting
inautonomoustransporttechnologies,drones,andalternativefuel
vehicleshaspositionedthecompanytosucceedintothe
foreseeablefuture.
Figure26:UPSGlobalFootprint
Page9
Appendices
AppendixA:UPSQuickFacts
AppendixB:InternationalShippingTrend-UPSvs.FedEx
Page10
AppendixC:UPSManagement
AppendixD:UPSBoardofDirectors
Page11
AppendixE:UPSRevenueMetrics
AppendixF:UPSFinancialProjections
Page12
AppendixG:DiscountedCashFlowModel(50%weight)
Page13
AppendixH:DividendDiscountModel(50%weight)
WACC
Grow
thRate
Page14
AppendixI:IncomeStatement
Page15
AppendixJ:BalanceSheet
Page16
AppendixK:StatementofCashFlows
Page17
AppendixL:Sources
UPS10-K,UPSInvestorRelations
UPS2016Presentation,UPSInvestorRelations
FedEx10-K,FedExInvestorRelations
OnlineandMobileShopping,Mintel
CourierandLocalDeliveryServicesintheUS,IBISWorld
UPSUsesDronestoDeliverPackages,WallStreetJournal
PharmaceuticalColdChainLogistics,PharmaceuticalCommerceandIMSHealth
ValueLineInvestmentSurvey
Morningstar
Bloomberg
Statista