I am going to add a new position this afternoon and buy 500 shares of United Parcel Service (UPS) around $55.86. UPS is the world's largest package delivery company, delivering more than 15 million packages a day to 6.1 million customers in more than 200 countries.
Its primary business is truck delivery, but in 2005 it expanded into the higher-margin services like logistics; supply chain design; execution and management; freight forwarding and distribution; customs brokerage; and consulting services, including Mail Boxes Etc/The UPS Stores. Its mix of business/retail is 65%/35%, with more than 50% of its delivered goods coming from the Internet. U.S. domestic package is 61% of total revenue, international package is 22%, supply chain/freight is 17%. Overall, its revenue mix is 76% in the U.S. and 24% International.
I like this story for a number of reasons. First, it's a direct way to play the global economic recovery -- as the economies improve, it will lead to stronger pricing and higher volumes. DHL's decision to exit the U.S. markets should also help UPS' ground and express volumes improve in a declining market, and the company should see meaningful pickup as the environment improves. To this point, in its most recent quarter, revenue per package increased sequentially from $9.70 to $9.90 and domestic/international volumes rose 11.9% sequentially and 9.1% from last year. Second, the company has aggressively reduced costs (11% year over year) and recently increased its total cost initiatives for a savings in 2009 to $1.4 billion, or 90 cents a share, from between $1.2 billion and $1.3 billion previously. The biggest component of this reduction has been the decline in compensation expense, which fell sequentially in its last quarter to 56.9% from 58.5% due to layoffs (its workforce is down 15,000 year over year). In 2010, wage inflation should continue to fall as the mix of newer drivers (50% cheaper) increases vs. more seasoned/senior level drivers. The better demand and lower costs will lead to positive operating leverage in 2010 and better earnings. Third, the stock has underperformed its peers and is down slightly for the year vs. Federal Express (FDX) , up 18%, and the railroad sector, up 30%. And fourth, the weaker U.S. dollar will be a tailwind for its international margins (50% of its international revenues comes from Europe).
The company has built a great franchise around the world and is positioned well to gain market share driven by secular trends in globalization, foreign trade and outsourcing. In addition, the company will continue to add new services, increase its scale and expand geographically, with an emphasis on the Asian markets. All of this combined should lead to 12%-15% long-term earnings growth with a bias to the upside in the recovery.
On its most recent conference call, the management made encouraging comments indicating that the economic climate improved in its third quarter with pockets of strength in U.S. package, international package and supply chain/freight operations relative to its second quarter. It also highlighted that Europe was beginning to turn. I will start with a small lot and average in, especially as the yield becomes more attractive (its current 3.2% yield isn't too shabby, though).
After my initial purchase, I will own 500 shares, or 0.92% of the portfolio.
Regards,
Jim Cramer
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DISCLOSURE: At the time of publication, Cramer had no positions in the stocks mentioned.