UPS (UPS) reports earnings on January 30th. Analysts expect revenue of $20.66 billion and EPS of $2.11. The revenue estimate implies 4% growth Y/Y. Investors should focus on the following key items.
Via https://newsapi.org online business online marketing online business opportunities Is A Wounded FedEx A Dangerous FedEx?
Revenue growth in the low single-digit percentage range may not sound like much to write home about, but given UPS’s size such growth could be considered impressive. It is even more impressive given the fact that FedEx (FDX) is flailing. In its most recent quarter, FedEx’s revenue fell in the low single-digit percentage range and its operating income fell by double digits. FedEx is wounded right now, and it could be dangerous.
UPS was buoyed by its Domestic segment, whose revenue rose by double digits. The other segments were stagnant to declining. Domestic experienced volume growth in the high single-digit percentage range; average revenue per piece fell 1%. Demand for faster delivery options spurred volume for next day air and deferred reported business. According to UBS analyst, Thomas Wadewitz, UPS may be less dependent on industrial production than FedEx. However, FedEx is making a concerted effort to become a major player in the B2C market:
Our B2B business provides greater density and stronger yields than B2C, and so, we are renewing our focus on commercial traffic, which makes up a significant portion of our ground volume. However, recognizing that e-commerce is the fastest growing segment in our business, we are working to position FedEx Ground as the B2C player. We have spent years enhancing our network, and today our FedEx Ground Network is well-equipped for handling this rapidly growing market, including seven-day operations for the majority of the U.S., and the dedicated large package operations for handling the growth and heavy and bulky items moving to the ground network.
While FedEx is more tethered to industrial production, UPS is more leveraged to eCommerce. It appears FedEx wants to change the equation. Growth in eCommerce is being driven by consumers purchasing more online and having products delivered to their homes. Any FedEx gains in the B2C space could come at UPS’s expense. The war will likely be fought domestically, the region where UPS receives the lion’s share of its revenue growth.
FedEx is also expanding its FedEx Ground to six and seven-day delivery. Does the world need seven-day delivery? I doubt it. However, I never thought next day delivery was that important until FedEx gave it to us. To uproot UPS in B2C, FedEx may need to offer additional amenities or additional services. Seven-day delivery could be FedEx’s attempt to take share by simply outworking UPS.
Via https://newsapi.org online business online marketing online business opportunities Could UPS’s Margins Be Impacted?
In its most recent quarter, UPS created a double positive effect by growing revenue and expanding margins. Its operating income of $2.1 billion bounced 23% Y/Y. EBITDA of $2.7 billion was up 21%. EBITDA margin was 15%, up 200 basis points versus the prior year period. Management also took cost management actions to offset headwinds from a weakening global economy and slowing U.S. industrial production. FedEx is taking cost out of its network to offset loss of Amazon (AMZN) business. However, FedEx also believes its margins shrank because revenue did not catch up with investments it made to expand into B2C and seven-day delivery.
FedEx was adamant about not laying people off simply to save costs. It appears to be marshaling more of its resources in areas it thinks it can grow – B2C and FedEx Ground. There are a few scenarios for how the war in B2C can play out for UPS, and many of them appear bad. UPS could lose share, it could lose pricing power or it may have to increase spending to match FedEx. Either scenario could cause its margins to shrink. For now, revenue growth and expanding margins could drive the UPS narrative. However, declining margins could potentially drive the narrative by the second half of 2020.
Via https://newsapi.org online business online marketing online business opportunities Conclusion
UPS is up over 15% Y/Y. Now FedEx is aggressively pursuing a major growth area for UPS. That cannot be good for earnings or the stock. Sell UPS.
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