Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Can UPS Make Money without Amazon?

The future of UPS (NYSE: UPS) is in question because Amazon (NASDAQ: AMZN) delivered 46% of its orders in the United States.

Amazon Logistics was on track to deliver 3.5 billion packages in 2019 Amazon claims, Vox Recode reports. In contrast, UPS delivered 5.2 billion packages and documents in the United States in 2018.

Importantly, Amazon claims Amazon Logistics now delivers more of its orders than either UPS or the United States Postal Service (USPS), Vox Recode notes. Additionally, Vox Recode claims Amazon Logistics could deliver between 46% and 50% of Amazon orders.

Amazon Logistics could be larger than UPS by 2022

Impressively, Vox Recode forecasts that Amazon Logistics could deliver 6.5 billion packages by 2022. Meanwhile, Vox Recode forecasts that UPS could deliver five billion packages in 2022.

Dramatically, Vox Recode predicts FedEx (NYSE: FDX) could deliver 3.4 billion packages by 2022. This Amazon Logistics could deliver almost twice as many packages as UPS by 2022.

Therefore, Amazon Logistics could be America’s largest delivery company by 2022. Hence, Amazon could dominate the delivery business if it delivers other companies’ orders.

However, I think Amazon could face political pressure and anti-trust action to spin off Amazon Logistics. I predict Anti-Trust regulators will target Amazon Logistics because it could drive UPS and FedEx out of many markets.

For instance, I think without Amazon packages UPS and FedEx could lose money on deliveries in many rural and suburban areas. Under those circumstances, FedEx and UPS could pull out of those areas.

Is UPS Making Money?

Conversely, UPS’s quarterly revenues and gross profits grew in 2019. For instance, UPS’s quarterly gross profit grew from $12.924 billion on 30 September 2018 to $14.025 billion on 30 September 2019.

However, UPS enjoyed a quarterly profit boost in December 2018 it could not see this year. To explain, UPS’s gross profits grew from $12.924 billion on 30 September 2019 to $14.613 billion on 31 December 2019.

I imagine the cause of this profit boost is holiday shipping. Consequently, that boost could not occur; or be smaller this year, because Amazon is handling its own shipments.

Additionally, UPS enjoyed healthy revenue growth in 2019. For instance, Stockrow estimates UPS’s revenues grew at a rate of 5.01% in the quarter ending on 30 September 2019.

As a result, UPS’s quarterly revenues grew from $13.718 billion on 30 June 2019 to $14.025 billion on September 30, 2019. Therefore, UPS’s business is growing despite the expansion of Amazon Logistics.

How Much Money is UPS Making?

On the other hand, United Parcel Service (NYSE: UPS) reported a slight income drop in that quarter.

In particular, UPS’s quarterly operating income fell from $2.143 billion on 30 June 2019 to $2.128 billion three months later. However, UPS’s quarterly common net income rose from $1.685 billion to $1.75 billion in the same period.

Meanwhile, UPS’s quarterly operating cash flow fell from $1.930 billion on 30 June 2019 to $1.486 billion on 30 September 2019. In contrast, UPS’s ending cash flow rose from -$326 million to -$31 million during the same period.

Thus, UPS is generating more revenue but keeping less cash and income from deliveries. Consequently, delivery seems to be less profitable.

Importantly, UPS’s cash and short-term investments fell from $4.797 billion on 30 June 2019 to $4.538 billion on 30 September 2019. Furthermore, UPS had less cash at the end of the year. UPS reported $4.841 billion in cash and short-term investments on 30 September 2018.

Amazon could Spend UPS out of Business

Thus, UPS could have less cash and income at a time when Amazon Logistics is making a direct threat to its business. Amazon is a huge threat to UPS because it had $43.401 billion in cash and short-term investments on 30 September 2019.

Therefore, Amazon has nearly 10 times more cash than UPS. Consequently, Amazon could outspend UPS by a ratio of 10 to one without borrowing money.

News reports show Jeff Bezos is spending that money on delivery. For instance, commercial van sales at three major automakers; Fiat Chrysler (NYSE: FCAU), Daimler AG (Frankfurt: DAI), and Ford (NYSE: F) rose in 2019 because of Amazon orders, Automotive News claims.

In detail, U.S. commercial van sales rose from 620,500 in 2017 to 675,100 in 2018, and 734,000 in 2019, Cox Automotive estimates. Amazon had a fleet of 30,000 delivery vans on the road in 2018.

In addition, Jeff Bezos says Amazon could buy another 100,000 electric vans from Rivian Automotive, Multichannel Merchant reports. Bezos claims those vans could be on the road by 2024. Therefore, Amazon could have a fleet of 130,000 vans in four years.

It looks as if Amazon is spending UPS and FedEx out of business. I have to wonder how UPS can compete against such spending.

Is UPS Still a Value Investment?

Given the extent of the Amazon threat, I think Mr. Market overpriced UPS (NYSE: UPS) at $116.95 on 8 January 2020. UPS is growing but I think it lacks the resources to compete with Amazon.

Thus I conclude UPS is not a value investment, but it is still a good dividend and income stock. For example, UPS shares paid a dividend of 96₵ on 15 November 2019.

In total, each UPS share offered investors a dividend yield of 3.19%, an annualized payout of $3.84, and a payout ratio of 51.05% on 8 January 2020. Plus, credited UPS with nine years of dividend growth on 8 January 2020.

UPS is a good company, but it operates in a business undergoing dramatic disruption by Amazon. Under those circumstances, the risk adverse need to avoid UPS stock for the foreseeable future.