Leading package delivery company United Parcel Service, Inc. (UPS) has increased its freight rate by 5.9% on non-contractual shipments in the U.S., Canada and Mexico. The increase is effective July 16, 2012.
The company offers a variety of less-than-truckload (LTL) and truckload (:TL) services to customers through its Freight segment, which remains a significant source of revenue with approximately 20% contribution in total revenue as of the first quarter 2012
UPS remains well positioned to benefit from firming industrial fundamentals and the LTL industry pricing discipline despite the prevailing economic volatility in the global market. The current price hike should support UPS' long-term goal of robust revenue and margin expansion plus earnings improvement.
Continued focus on pricing improvement signifies UPS' initiative to better its revenue and margins along with earnings improvement over the next several years. Earlier, UPS hiked its general rate by 4.9% for ground packages, air express and the U.S. origin international shipments, effective January 2012.
Apart from the routine rate hikes, UPS has a series of initiatives underway that is expected to deliver industry leading margin and earnings growth over the long term. Key among these is renewed focus on yield improvement in the U.S. Domestic Package division.
Other drivers include increased export volumes, operating leverage benefits and capacity expansion plans. Further, the company continues to expand its footprint in emerging markets such as health care, which could be a larger contributor to growth in the future. The business wins are expected to expand the distribution reach further to Asian and Latin American markets as well as emerging countries like China and Brazil.
We believe the growth initiatives will aid the company to deal with near-term headwinds such as rising fuel prices, substantial capital investment and high labor unionization. These would give UPS a competitive advantage over its peers like FedEx Corporation (FDX).
We are currently maintaining our long-term Neutral recommendation on UPS. The stock retains a Zacks #4 Rank (Sell) for the short term (1–3 months).
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