United Parcel Service, Inc.

United Parcel Service, Inc. - Financial and Strategic Analysis Review

Publication Date: 18-Mar-2011 Reference Code: GDTTL33923FSA

Company Snapshot
Key Information
United Parcel Service, Inc., Key Information Web Address www.ups.com Financial year-end December Number of Employees 400,600 NYSE UPS
Source : GlobalData

Company Overview
United Parcel Service, Inc. (UPS) is a US-based leading package delivery company. The company offers transportation, logistics and financial services worldwide. UPS renders logistics, distribution, transportation and freight services through air, sea, ground and rail transportation. It also provides freight forwarding, international trade management, customs brokerage and specialty services through a fleet comprising about 102,018 vehicles, 216 jet aircrafts and 294 chartered aircrafts. On every business day, it delivers more than 15.5 million packages and documents to 7.9 million customers in more than 220 countries and territories globally.
21.37 11.04.00 43.71 135.93 11.86 0.03 Expanding Operating Margin Strong Market Position Integrated Global Network Opportunities Threats Rising Manpower Costs Government Regulations Legal Proceedings Lingering Contract Negotiations United Parcel Service, Inc., SWOT Analysis Strengths Weaknesses

Key Ratios
United Parcel Service, Inc., Key Ratios P/E EV/EBITDA Return on Equity (%) Debt/Equity Operating profit margin (%) Dividend Yield

SWOT Analysis

Note: Above ratios are based on share price as of 26-May-2011 Source : GlobalData

Share Data
United Parcel Service, Inc., Share Data Price (USD) as on 26-May-2011 EPS (USD) Book value per share (USD) Shares Outstanding (in million)
Source : GlobalData

Established Air Hub Network 72.97.00 3.48 8.05 1,003 Strategic Initiatives

Exit of DHL from the US Small Intense Competition Package Market

Source : GlobalData

Performance Chart
United Parcel Service, Inc., Performance Chart (2006 2010)

Financial Performance
The company reported revenues of (U.S. Dollars) USD 49,545.00 million during the fiscal year ended December 2010, an increase of 9.38% over 2009. The operating profit of the company was USD 5,874.00 million during the fiscal year 2010, an increase of 54.54% over 2009. The net profit of the company was USD 3,488.00 million during the fiscal year 2010, an increase of 62.08% over 2009.

Source : GlobalData

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United Parcel Service, Inc. United Parcel Service, Inc. - SWOT Analysis
SWOT Analysis - Overview United Parcel Service, Inc. (UPS) provides package delivery services worldwide. It operates through a fleet of 102,018 vehicles, 216 jet aircrafts and 294 chartered aircrafts. The companys widespread operations and integrated global network are its key strengths. However, involvement in a host of lawsuits and impasse in contract negotiations remain major areas of concern. Nevertheless, the company has growth opportunities through restructuring plans and strategic business initiatives. However, intense competition and rising manpower costs could negatively impact the overall performance of the company.

United Parcel Service, Inc. - Strengths Strength - Expanding Operating Margin During the fiscal year 2010, the company reported an operating profit of $5,874m, compared to $3,801m in 2009. The company's operating margin was 11.86% for the fiscal year 2010. Such moderate operating margin may indicate efficient cost management or a strong pricing strategy by the company. The operating margin has increased 347 basis points (bps) over 2009 which may indicate management's high focus on improving profitability. Such position contributes to the overall performance of the company. Strength - Strong Market Position UPS holds a strong position in the global logistics market. The company is one of the largest package delivery companies in the world. It also enjoys a dominant position in the US less-than-truckload industry. It is also a global leader in supply chain management. UPS serves a more than 1.8 million shipping customers and 6.1 million consignees in over 220 countries and territories per business day. The company delivered around 15.5 million packages per day worldwide in 2010. The companys operations comprise delivery of letters, documents, and packages throughout the US and worldwide. Besides, it also involves in forwarding and logistics operations. In addition to offering small-package, freight and supply services, UPS engage in cross-selling its services to customers. The strong market position and extensive operations of the company enable it to serve a large customer base, which drives its top line performance. Strength - Integrated Global Network The extensive operations of UPS are supported by its robust ground and air network, which has been integrated globally. UPS has operations in the United States, Asia Pacific, Europe, Latin America and Caribbean and Africa. It has a total fleet of 102,018 vehicles comprising cars, tractors and trailers, and 510 aircrafts. The companys network handles all levels of service including air, ground, domestic, international, commercial, and residential, through a single pickup and delivery service system. Through established network, UPS emerged as a leader in the domestic as well as international market with revenue of $49,545m in 2010. This integrated model is backed by engineering systems that ensure efficient asset utilization and network efficiency, on a day-to-day basis. United Parcel Service, Inc. - Weaknesses Weakness - Legal Proceedings UPS has been involved in several litigations. The company was involved in a case, Barber Auto Sales v. UPS, in which, the breach of contract claim from UPS assessment for shipping charge corrections against the shipper for heavy weight than reported. Additionally, the charge sheet of Cornn v. UPS, in which, about 23,600 drivers alleged that UPS improperly denied wages and/or overtime and meal and rest periods to them. This lawsuit was settled in 2007, with UPS being asked to make a total payment of USD 87 million. Recently, Michael Marlo sued the company alleging UPS had unfairly misclassified him under state and federal wage and hour laws for avoiding payment for meals, rest periods and overtime. UPS is also involved in several other law-suits related to diverse counts including conspiracy of fixing fuel surcharge rates and cheating franchise owners. Such involvements in law suits would not only increase the expenses of the company but also negatively impact its brand image in the market. Weakness - Lingering Contract Negotiations The company has been holding contract negotiations with its airline mechanics, since November 2006, which may result in disruptions of operations. Airline is a major backbone of UPS delivery system. In September 2009, airline mechanics of UPS, affiliated to International Brotherhood of Teamsters Local 2727 in Kentucky, voted in favor of a strike, after their contract negotiations with the company, since November 2006, have not made headway. The workers had been opposing reduction in compensation packages and healthcare contributions, and increased outsourcing of maintenance work overseas. Contracts of airline mechanics were supposed to be amended by November 2006. Airline mechanics can go ahead with strike only when the National Mediation Board thinks that the parties have reached a stalemate, as the union is bound by the Railway Labor Act. Any probable strikes by the companys airline mechanics in 80 airports in the US will

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United Parcel Service, Inc.

impact its operations. United Parcel Service, Inc. - Opportunities Opportunity - Established Air Hub Network The company, under its strategic multi-year activity, is involved the expansion of technologically advanced air package sorting facility in the world. The Louisville-based Worldport air hub is considered to be the largest air hub for cross-selling services to a diverse customer base at cost controls. With the expansion, the package processing would hold a sorting capacity of 416,000 packages per hour, a 37% increase over its previous capacity. Additionally, UPS has commenced the operations of its Asia facility located in Shenzhen, China. The Shenzhen hub totals nearly 89,000 square meters in size and has a processing capacity up to 18,000 pieces per hour. Such new and expanded air networks would enhance its domestic and international revenue through cross-selling services and technology driven efficiencies. Opportunity - Strategic Initiatives The company has been implementing strategic plans internationally to capture the growing demand for air freight logistics and delivery market. In 2010, the company added nearly 101 new field stocking locations in China for strengthening parts logistics (SPL) network. UPS initiated a new international express delivery service that covers nearly 215 countries. The company also launched new ocean freight service that offers up to 20% faster door-to-door delivery compared to other less-than-container-load (LCL) services in the market. Further, UPS also opened an $86m worth large, modern package sorting and delivery facility in Portland area. It also established a joint stock company in Vietnam. Such strategic initiatives would allow the company to realize the increasing demand for logistics solutions in global markets. Opportunity - Exit of DHL from the US Small Package Market The exit of Deutsche Posts DHL from the US small package market in 2009 is expected to benefit UPS in the long-run. According to in-house research, DHL had a market share of 8% in the domestic air parcel market and 3% market share in the US ground express market, which translates into a market value of about USD 3.4 billion. UPS could be in a position to handle DHLs business without major capacity additions. In order to capture the market share, UPS took necessary initiatives for erstwhile DHL shippers who were looking at UPS as an alternative. The company has also used direct mail and advertisements to win the contracts previously held by DHL. United Parcel Service, Inc. - Threats Threat - Rising Manpower Costs The rise in labor costs across the world, principally in the US and the UK, could be a cause for concern to the company. According to the Fair Labor Standards Act (FLSA) by the United States Department of Labor, the workers are entitled to a minimum wage of not less than USD 7.25 per hour effective July 24th, 2010. Also, effective October 2010, the government of UK has raised the labor rates from GBP 5.80 to GBP 5.93 per hour for adults. With the companys employee base of nearly 408,000 people, it is bound to come under pressure due to the pay hikes. If it fails to comply with future price hikes, it may face labor strike that might result in huge losses for the company. Threat - Government Regulations UPS is subject to several regulations and policies, which could have adverse effect on the overall operations of the company. The various regulating bodies of air transportation services include Transportation Security Administration (TSA), the U.S. Department of Transportation (DOT) and the Federal Aviation Administration (FAA). The various aspects regulated by DOT authority include economic aspects of air transportation, such as discriminatory pricing, non-competitive practices, interlocking relations and cooperative agreements. It also lays down regulations for the import and export of shipments to and from the US. Failure to comply with these regulations could impact the overall operations of the company. Threat - Intense Competition The express package and freight market is highly competitive, which could affect the growth of the company. The companies in the industry compete on factors like price, geographical coverage, reliability, frequency and capacity of scheduled service, ability to track packages and innovative service offerings. Key competitors of UPS include The United States Postal Service, DHL International GmbH, Con-Way Inc., FedEx Corporation, amongst others. Some of these competitors have greater resources, lower costs and more favorable operating conditions. If the company fails to launch innovative services or efficiently serve its customers, the growing competition could lure away its customers. Competition could also compel the company to compete in product pricing as well, resulting in lower profitability.

NOTE: * Sector average represents top companies within the specified sector

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The above strategic analysis is based on in-house research and reflects the publishers opinion only

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