United Parcel Service UPS witnessed a disappointing 2018, evident from its share price depreciating 18.2% during the same.
What’s Ailing UPS?
The company made significant investments in facilities’ upgrade to meet the surge in demand following rapid growth in e-commerce. UPS incurred $4.5 billion of capital expenditure in the first nine months of 2018.
We expect high costs to hurt UPS’ fourth-quarter 2018 results as well. The Zacks Consensus Estimate for fourth-quarter earnings has slid in excess of 1% over the last 60 days. In fact, capex for 2018 is projected between $6.5 billion and $7 billion, bulk of which will be directed toward new technology, aircraft and automated capacity. The increased investments imply a rise in costs.
Trade-related tensions with China is a headwind for the stock as UPS has Chinese exposure. For instance, UPS joined forces with SF Holding in 2017 to strengthen its footprint in the Chinese market. Moreover, as the company operates globally, it is vulnerable to foreign exchange-related risks.
Though positive on the labor deal approval by its freight workers, we note that the turmoil in the run up to the voting procedure might hurt the company’s fourth-quarter results at its freight division. Prior to the voting procedure, UPS had stopped pickups for its freight customers. The move was aimed at emptying its freight network of any cargo that could have been stranded in the event of a strike materializing, had the polls not gone in favor of this Zacks Rank #4 (Sell) stock.
What Awaits UPS in 2019?
Recommendations from a task force appointed by President Donald Trump suggested that the United States Postal Service (USPS) should raise the price for shipping packages. The move might affect online retailers like Amazon.com AMZN and eBay EBAY massively. It may also hit UPS apart from its rival FedEx Corporation FDX as these companies often use USPS for the last mile delivery
Competition is likely to intensify for UPS with Amazon looking to expand its logistics network. In November 2018, media reports indicated that Amazon was offering steep discounts for its pilot shipping program that are currently being scrutinized. The discounts made Amazon’s shipping service, launched last year, cheaper than those offered by UPS.
Despite the above-mentioned challenges, we expect consistent e-commerce growth to benefit this package delivery company in 2019. In this regard, the company anticipates cross-border e-commerce volume to expand 28% in the 2019-2021 timeframe.
Additionally, we expect UPS, which hiked its quarterly dividend by 10% in 2018, to maintain its share-holder friendly approach in 2019. The current tax law, leading to substantial savings, should support dividend raises and buybacks in the current year. UPS' solid free cash flow hints at the possibility of a dividend increase in the near future.
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