Is UPS Doomed or a Value Investment?

The future of UPS (NYSE: UPS); the company formerly known as United Parcel Service, looks bright despite a significant decline in income over the past year.

UPS is a modern value favorite because it provides a key service that makes ecommerce; and Amazon (NASDAQ: AMZN), possible: delivery or logistics. If there was no UPS or FedEx (NYSE: FDX) there would be no Amazon or Walmart.com.

This makes UPS a classic value investment because it is the key to other companies’ success. Buying into enterprises is one of Warren Buffett’s favorite strategies; Berkshire Hathaway (NYSE: BRK.B) owns the McLane Company, which provides logistics services for a wide variety of retailers.

UPS has the potential to tap into a far larger market with the help of Amazon, Walmart (NYSE: WMT) and other ecommerce giants. After all its’ brown vans stop everywhere in town ranging from the trailer park to the country club.

Working class people are getting just as addicted to Amazon as the middle class. Last week I was at the Verizon Store, where I overheard a working-class Latina telling somebody how she depends on Amazon for diapers. That’s good news for UPS because it probably delivers those diapers.

Is UPS Making Money?

The former United Parcel Service certainly has vast value potential but is it making money? The answer is yes, but not as much money as before.

UPS’s income fell by $1.415 billion during the 12 months between 30 June 2016 and June 30, 2016, ycharts data indicates. The delivery giant reported a net income of $4.988 billion in June 2016 and $3.573 billion a year later.

Judging by the net income, UPS has a good business that’s not as good as it used to be. Despite that it’s still a growing business that is making a lot of money.

Proof that UPS is still making a Lot of Money

The. ycharts numbers prove that UPS is still capable of significant growth and making a lot of money. Some highlights of UPS’s second quarter 2017 earnings report include:

• Revenues that grew by $1.12 billion during second quarter 2017; and $3.58 billion during the 12 months between June 2016, and June 2017. UPS reported $59.34 billion in revenues in June 2016, revenues of $61.80 billion in March 2017 and $62.92 billion in revenues on June 30, 2017.

• A profit margin of 8.79% on June 30, 2017.

 

• A 4.08 earnings per share (EPS) number on 30 June 2017.

 

• A free cash flow of $1.311 billion on June 30, 2017.

 

• $4.401 billion in cash from operations on June 30, 2017. This was down dramatically from June 2016 when UPS generated $7.884 billion in cash from operations. Although it has grown slightly since March 2017 when UPS reported $4.042 billion in cash from operations.

 

• Assets of $39.72 billion on 30 June 2017, this was a slight improvement from 2016 when the assets were $38.34 billion.

• Cash and short-term investments of $4.60 billion on June 30, 2017. This was up from $3.718 billion in March but down from $5.672 billion in June 2016.

 

• A market capitalization of $97.94 billion on August 17, 2017.

 

• An enterprise value of $112.88 billion on August 17, 2017.

 

These numbers prove that UPS is a great value investment because it can take big income losses and still make a lot of money. More importantly it generated and keeps a lot of float even though the income was falling.

Why the Retail Apocalypse is Good News for UPS

The financial figures also demonstrate that UPS might just be the best retail investment around because it makes a lot of money; no matter what retailer is winning the online wars.

A big opportunity for UPS is the ongoing retail apocalypse created by Amazon’s relentless expansions. Every time a brick and mortar retailer dies it creates more business for UPS because that store’s customers are probably ordering from Amazon or Walmart.com.

The potential market for delivery is growing dramatically; because online retailers are beginning to compete directly with even low-end brick and mortar operations. By selling basics; such as diapers and laundry detergent, Amazon and Walmart.com now threaten even five and dime stores such as Dollar General (NYSE: DG).

UPS is a Great Value Investment

All this makes UPS a great value investment because it has a bright future, makes a lot of money and rewards its investors.

On June 30, 2017 UPS investors were smiling all the way to the bank with a wonderful return on equity of 236.5%, ycharts reported. That makes UPS a great growth stock with a lot of potential for the future.

Those investors were also very happy with the 83¢ dividend UPS paid out on August 10, 2017. That dividend was up 5¢ from August 2016 when it was 78¢. More importantly UPS’s dividend has gone up 5¢ a year for every year since 2013 – four years of straight increases.

Therefore UPS is a triple threat; a great value stock, an excellent dividend stock and a tremendous growth opportunity. Now we have the question how long can UPS keep it up? The answer is longer than you think, even though there are some serious threats to its future lurking out there in the retail battlefields.

Some Great Omens for UPS’s Future

Many of the omens for UPS’s future look great, just a few developments that might greatly increase UPS’s revenues and income include:

• Falling oil prices. Two of UPS’s biggest expenses are diesel fuel for its trucks and vans and jet fuel for the planes – both of which are made from oil. Anybody who pays attention to the financial news; knows oil prices are falling and talk of an oil glut or oversupply is rampant. This means one of UPS’s biggest and most basic expenses may stay low for the foreseeable future.

• Better vehicle technology. Recent advances in automotive tech hold the key for reduced expenses at delivery services like UPS. Some of the biggest opportunities include:

 

• Electric vehicles. Electric vans or trucks would be far cheaper to operate because electricity is a far cheaper fuel than diesel. More importantly electric vehicles have fewer moving parts so there might be lower maintenance costs. Also eliminated would be the expensive infrastructure needed to provide fuel for the vans trucks. Electric semi-trucks in particular would greatly reduce operating costs.

 

• Self-driving vehicles. A self-driving delivery van might reduce costs by eliminating the need for a highly paid driver with a CDL. Instead all you’d need is a laborer to take the packages to the door or gather the signatures. Self-driving vehicles might reduce the number of accidents and insurance costs as well.

 

• Drones you can use your imagination here.

• The Hyperloop. This super-disruptive technology would completely transform logistics because it would provide super-efficient ground transportation at speeds up to 700 miles (1,126.54 kilometers) per hour. The unicorn Hyperloop One just tested a full-sized vehicle at speeds of 309 kilometers (192 miles) per hour in its system, Wired reported.

 

• If it works, Hyperloop would make some astounding advances in logistics; including long-distance same day delivery possible. An example of this would be same-day service between New York and Chicago.

 

• If it works as advertised Hyperloop would be far cheaper and more efficient than cargo planes. That would greatly reduce shipping costs and make it far easier for UPS to expand its operations. UPS might be able to ship hundreds of cargo containers through the loop for the cost of one plane flight.

• New delivery markets including meal kits, groceries, and items manufactured via 3D printing to name just a few.

 

Major Threats to UPS’s Future

Despite the good omens there are some very dark clouds on UPS’s horizon including:

• The growth of store pickup of items ordered online. Walmart is making a major push into this and Amazon is expanding its brick and mortar footprint by building stores and trying to acquire Whole Foods. This is a huge problem because it would allow retailers to provide their own logistics with existing fleets of trucks.

 

 

• Some retailers are developing their own logistics and delivery solutions. Walmart is experimenting with delivery by employees, several companies including Amazon have deployed fleets of branded delivery vehicles and companies like Kroger and Walmart are experimenting with Uber and Lyft delivery. Amazon is also buying its own fleets of trucks and planes.

• Next generation delivery solutions including those offered by Uber, Lyft, Deliv and Google Express. Some of these might be cheaper because they use independent contractors instead of union drivers and rely on the drivers’ own vehicles.

 

Despite the potential threats, UPS is still a great investment. I consider a modern day and widows’ stock. You would be well advised to buy it.