Europe Will Turn Into A Growth Driver For United Parcel Service

Includes: UPS
by: Gemstone Equity Research

United Parcel Service Inc. (NYSE:UPS) serves as the world's largest package delivery company. Although the company generates a majority of its revenue from the U.S. the company is putting efforts into expanding its operations internationally. In this article I will analyze the performance of the company's international package operations. I will also discuss some of the recent moves undertaken by the company in order to expand its international package operations. This will determine the potential of growth for the company in the international markets.

International Operations Performance Overview

Source: UPS 10K and Earnings Release

The table above shows that the company's international package operations generated 22% of the company's total revenue in FY 2013. This contribution reflects a decline from the 23% contribution made by the segment in FY 2011. The segment recorded a 1% decline in its revenue in FY 2012 but recovered by logging a 3% rise in FY 2013. Therefore, I will determine how the segment will contribute to the company's growth in the coming years in my article. Further analysis of the segment revealed that the segment generates a majority of its revenue from export activities in the company's international region. This is shown in the following table that highlights the fact that revenue from both domestic and export activities increased in FY 2013 after recording a fall in FY 2012. I will determine the outlook of the company's revenue generation from export activities in the region further in my article.

Source: UPS 10K and Earnings Release

Before moving towards determining the potential for the company's growth in the region let us analyze some other metrics that further elaborate the revenue performance of the company's international package segment.

Source: UPS 10K and Earnings Release

The chart above shows that although export is the major contributor to the segment's revenue it accounted for 41% of the segment's average daily package volume. The company's average daily package volume recorded a growth of 6% in FY 2013 in comparison to FY 2012. The forecast for export activities in the region will determine the potential for volume growth in the region. The growth in export volume will further impact the segment's revenue as the segment generates higher average revenue per piece from its export volume as shown in the table below.

Source: UPS 10K and Earnings Release

After determining some of the factors contributing to the company's performance of international operations let us talk about the outlook of the major factor I have identified above: export activities.

The Outlook of International Export Activities

Europe is the company's largest region of operations outside of the U.S. Revenue from Europe accounts for roughly half of the company's total international revenue. The company regards the region as one of its growth engines. Factors contributing to this are the vastly fragmented nature of the market and the fact that exports make up a significant portion of Europe's GDP. The company expects its well-known, trusted brand and distinctive integrated network will work to create strong growth potentials in small package exports in Germany, the U.K., France, Italy, Spain and the Netherlands. Economic conditions and activities in Europe not only affect the company's revenue from its international operations but also its revenue from the U.S. segment as well. This is a material impact as previously the company's U.S. export volume declined particularly due to a decline in exports from the U.S. to Europe as the economic weakness within the European Union adversely impacted volume.

Europe covers a large share of world trade partially because trade volume between European countries is large. The recession in the European region has had a significant impact on the region's export volume. Growth in the Euro Area, after two consecutive years of contraction, is projected to grow by 1.1% in 2014, 1.4% in 2015 and 1.5% in 2016. The U.K. is ranked top in Europe as a gateway to the rest of the world and is forecast to gain momentum in its export volume as the region is predicted to pick up in the coming years. HSBC expects the U.K.'s goods exports to expand by an average of 6% per annum during 2016-2020.Central and eastern European economies will also benefit from stronger exports to the higher-income regions Europe.

Initiatives in Europe to Grasp Growth

The company recently acquired U.K.-based Polar Speed that is an innovative provider of temperature-sensitive pharmaceutical supply chain solutions in the U.K. This acquisition will further strengthen the company's healthcare network across Europe. The transaction will support the success of the company's healthcare strategy as the company will expand its services in this growing market. Polar Speed is acknowledged for its commitment to pharmaceutical logistics consumers. It specializes in active temperature-controlled carriages to hospitals, pharmacies, wholesalers, and surgery centers along with deliveries to end patients. Its customers are comprised of some of the well-known global pharmaceutical brands. Polar Speed employs a fleet of 118 temperature-controlled vehicles equipped with sophisticated technology for transporting medicines and healthcare products.
This acquisition will add three facilities with advanced warehouse management systems to the company's current global healthcare network that will now have 45 healthcare facilities in total.

The European region is striving to make people aware of the expertise required in handling a pharmaceutical supply chain. An association was formed in the region to deal with healthcare logistics and transportation.

Additionally, the company will reap the benefits of capital expenditure it incurred in the previous years. The expense was made over construction projects in Europe and Asia that included a $200 million expansion to the company's European air hub in Cologne, Germany that commenced in 2011 and will be operational by FY 2014. The air hub will expand 70% to a capacity of 190,000 packages per hour.

Takeaway for Investors

According to my analysis the company's international operations will turn into a high growth area for the company in terms of revenue generation. The rise in export volume in the European region will bring more business for the company as the region is forecasted to recover both economically and business-wise. The company is also investing to expand its operations in the region to cater the anticipated growth. The U.S. is already a revenue growth region for the company. The combined power of the company's U.S. and international operations are predicted to flourish in the coming years making the company's stock attractive for investment based on up-coming top-line growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article