Is UPS in Trouble?

United Parcel Service (NYSE: UPS) has had some rough times lately, it suffered a slight revenue drop last year after incredible growth in 2014 and Amazon (NASDAQ: AMZN) announced plans to set up its own logistics operations.

These two developments have prompted some stock bloggers to start downgrading UPS. Are these pundits right? Is the company also known as Big Brown, really facing decline or does it have a bright future.

The revenue drop at UPS has actually been pretty minimal the company actually finished 2015 with slightly more revenue than it reported at the end of 2014. UPS reported a revenue of $58.23 billion in December 2014 and $58.36 billion in December 2015. The problem is that UPS’s revenues hit a high of $58.43 billion in March 2015, then fell to $58.26 billion in June and $58.2 billion in September.

My guess is that the high revenue number represents the Christmas shopping rush, which means we’re likely to see a similar upsurge in UPS’s revenues when it reports the numbers for first quarter 2016. This shows that UPS like retailers is now very vulnerable to the holiday shopping rush. Its revenues and perhaps its profits are dependent on the gift-buying surge in December.

A related factor that might boost UPS’s revenues in its next earnings report is fuel prices which are down. Lower fuel prices might not affect UPS immediately because it might hedge or buy fuel in advance which can lock in higher prices as well as lower rates.

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Has UPS’s Revenue Growth Stalled?

The real problem at UPS is that its revenue growth in 2015 did not match the stellar performance in 2014. UPS started 2015 with a revenue figure of $55.44 billion and finished with one of $58.23 billion. That adds up to $2.79 billion in additional revenue for the year.

This makes me wonder if UPS’s revenue growth has stalled because it also experienced significant revenue growth in 2012 and 2013. In 2013, UPS added $1.3 billion in additional revenue – it started 2014 with $54.13 billion in revenue and finished with $55.44. The delivery service started 2012 with $53.1 billion in revenue and finished with $54.13 billion an increase of around $1.2 billion.

These figures make me wonder if UPS has lost its momentum or if its revenue growth has hit some sort of barrier. This theory is made all the more credible by a look at the revenues of FedEx (NYSE: FDX) which did not appear to lose its momentum in 2015.

FedEx’s growth pattern has been similar to UPS’s, it added $1.63 billion in 2012 rising from $41.32 billion to $43.47 billion over the course of that year, $950 million in revenue in 2013 rising from $43.47 billion at the end of 2012 to $44.81 billion a year later, $1.95 billion in 2014 increasing from $44.81 billion to $46.76 billion and $2.74 billion in 2015 rising from $46.76 billion to $49.5 billion in February 2016.

At this rate it looks as if FedEx will soon catch up with UPS in revenue. It also looks like FedEx still has momentum while UPS does not. It also looks as if FedEx will top the $50 billion revenue mark sometime this year.

Is Amazon Really Boosting UPS’s Revenue?

The apparent loss of momentum at UPS calls the popular theory that growth in ecommerce and sales at Amazon.com in particular are the key to delivery companies’ growth. UPS’s revenue stall came at a time when Amazon’s revenue was surging forward.

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Amazon’s revenue grew by $18.02 billion over the course of 2015, rising from $88.99 billion in December 2014 to $107.01 billion in December 2015. Despite that UPS’s revenue seemed to be stuck in place, the boom in Amazon sales is not benefiting UPS.

There are several potential explanations for this revenue growth slowing including:

  1. Around 47% of the sales at Amazon are actually made by third party sellers that may not be using UPS. I conduct some sales through Amazon myself and I almost always end up using the cheapest method the plain old fashioned US Postal Service. My guess is that most sellers like me are attempting to cut costs and offer lower prices by doing the same thing.

 

  1. The discounts that UPS offers through Amazon are cutting into the revenues. Amazon sellers get a much lower rate if they buy shipping through UPS.

 

  1. Amazon is taking a large portion of business away from competitors that also ship through UPS. I recently noticed that some items such as shipping supplies cost less at Amazon than at Sam’s Club which uses UPS. I imagine that some other customers have noticed the same thing.

 

  1. FedEx has simply gotten more competitive and better able to take business from UPS.

 

  1. UPS could be losing shipping volume elsewhere, for example people could be shipping fewer paper documents and using digital documents. Document shipment for lawyers and others has been a high-profit mainstay of both UPS and FedEx’s business for at least a generation.

All this means that there are serious limits to UPS’s business that are causing its growth to stall. The interesting thing to see is whether UPS’s revenue will start to contract.

Another good question to ask will FedEx hit a similar barrier in the near future? Given the situation at UPS that is a strong possibility.

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Is Amazon Logistics a Threat to UPS?

Investors need to ask these questions because Amazon’s escalating effort to create its own logistics network is looming over UPS and FedEx. The Everything Store has announced plans to buy or lease its own semi-trucks and planes to haul packages around the country.

The ecommerce giant has also experimented with its’ own delivery services in cities and flirted with next generation technology including drones and Uber style apps. Jeff Bezos and his team have been taking these steps to control shipping costs, which means paying less money to UPS and FedEx.

This threat is not as great as some investors think because it will take several years for Amazon to set up such a logistics network. UPS and FedEx will have plenty of time to counter it.

The real problem for UPS right is the slowing in revenue growth. That slowdown should not concern investors though because UPS is a pretty good stock. My take is that UPS’s revenue will probably stay at the same level for the next few years unless some sort of Black Swan event occurs.

Shipping services might not enjoy the kind of breakneck growth that has characterized the sector for the past few years but they still should continue to make money. This makes such UPS a value investment, even as Amazon prepares to compete with it.