United Parcel Service, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

United Parcel Service (UPS) is a global package delivery company, with a vast transportation network that facilitates the movement of goods, operating various services including logistics, freight forwarding, and supply chain solutions across more than 220 countries and territories.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

UPS, often referred to as just UPS, is a dominant player in the global package delivery and logistics industry. The company’s core business revolves around picking up, sorting, and delivering packages for both domestic and international clients. The company’s primary goal is to provide reliable transportation solutions to their customers.

Revenue Distribution: UPS’s revenue is segmented into 3 parts: U.S. Domestic Package, International Package, and Supply Chain Solutions.

U.S. Domestic Package: Includes all shipments within the United States, catering to both commercial and residential customers.
- International Package: Involves cross-border shipments, with operations in over 220 countries and territories across the globe.
- Supply Chain Solutions: Encompasses logistics, freight forwarding, and other supply chain services that extend beyond standard package delivery.
Industry Trends: The logistics industry is increasingly being driven by the continued growth in e-commerce, forcing companies to compete on delivery speeds, logistics, and visibility of the shipping process.

Technological advancements are pushing a more automated system and improved delivery processes. * Global supply chains are in turmoil as of late, the cost of fuel and labor has increased significantly.
Margins: In their most recent reports, UPS has been reporting increased margins due to cost control measures, and also due to increased prices.

The increased fuel costs have been passed onto the consumers by a fuel surcharge in some segments.
Cost-cutting measures are underway.
The company has been facing tough labor negotiation, that is likely to increase the costs in near future.
Competitive Landscape: The package delivery industry is highly competitive. The primary competitors are other transportation and logistics companies like Fedex, DHL, etc. Amazon also poses a threat by building out its own logistics network.
- There is also increased competition from low-cost regional and global players.
What Makes UPS Different: UPS differs from its competitors because of its vast global network, its integrated logistics solutions, and brand loyalty with it’s customers.

The company’s focus on operational excellence and customer experience creates a degree of customer loyalty.
- The company’s history of innovation in logistics and technology gives it a slight edge.

Financials

Revenues: Revenues in 2022 increased to $100.3 billion from 97.3 billion in 2021, mainly from increase in package revenue.

This indicates strong growth despite the global supply chain turmoil.
Profitability: Operating profit also increased from $11.4 Billion to $12.5 Billion, showing good cost control and pricing power.
- Net profit increased from $7.2 billion to $8.7 billion from 2021 to 2022.
Cash Flow: UPS consistently generates strong cash flow from operations, which allows it to invest in growth, pay dividends and reduce debt.
Net cash provided by operating activities in 2022 was $11.1 billion.
This is a good indicator of cash generative nature of the business.
Capital Structure: As of December 31, 2022, UPS has over $12.5 billion in long term debt, but also has around $7 billion cash and marketable securities.
The net debt is around $5.5 billion, which isn’t alarming given the cash generation of the business.
The company continues to have a fairly good debt to capital ratio.

Moat Analysis

Based on the above analysis, the moat rating of 3 seems appropriate. Here’s why:

Network Effects: While not a pure network effect in the traditional sense, UPS benefits from a vast and extensive global network.
This network is very difficult to replicate, because they already have infrastructure in place.
The company’s wide delivery network provides a strong competitive advantage in terms of time to market and coverage. * A new company will have to spend a lot of time and effort to match this network.
Switching Costs: Certain customers such as enterprise clients face high switching costs, due to their integration with UPS’s software, and established processes.
Such switching costs are beneficial for customer stickiness.
These factors create an advantage for the company.
Cost Advantage: The company, with its extensive infrastructure, enjoys cost advantages, particularly in its logistics solutions, but competition in shipping, especially from cheaper substitutes, keep the prices down.
While they have some advantage, it is not huge and is easily replicable in today’s world.
Intangible Assets: The brand image of UPS is quite strong, but it doesn’t provide great pricing power.
The brand does help the company in attracting clients, but it can also be duplicated.
Durability of Moat: The company’s moat is relatively durable, but at present, not overly wide because of competition from both established players, and from new upstart companies.

Risks

Economic Slowdowns: Global economic downturns and recessions could have a big impact on the demand for delivery services.
Competition: The business is facing pressure from intense competition. New players can challenge market dominance.
Fuel Costs: Fluctuating fuel prices greatly affect profitability for delivery based businesses.
Labor: UPS faces labor pressures from its unions that are seeking higher pay and benefits.
Technological Disruption: Continuous disruption due to new tech, and innovations to other alternatives could disrupt the supply chain.
It’s imperative that UPS integrates new technologies while maintaining current operations.
Security Threats: The company needs to spend a lot of money in cyber security and safety.
The company needs to make sure that the data doesn’t get compromised.

Business Resilience

UPS is fairly resilient and can weather the above mentioned risks well enough.

The company has demonstrated it can adapt to changes in customer demand and also can adjust quickly to different market scenarios.
The company also has very diverse revenue streams that are not concentrated in one market or geography.
The large scale of operations means it has great operational expertise and cost control, which further leads to operational resilience.

Understandability: 2 / 5

While the business model of package delivery is easy to grasp, the details of global logistics and supply chains, various segments of the business make the company rather complex to understand for a lay-person.
Also there are a lot of moving parts in terms of pricing power, network dynamics, and contracts, making it a bit complex to understand.
It takes a deeper understanding of logistics to truly grasp the economics of the business.

Balance Sheet Health: 4 / 5

The company has a healthy balance sheet. While having lots of long term debt, they have sufficient cash reserves, and also have solid operational cashflows to pay those debts.
The company has good credit rating too.
They also generate enough free cash flow that they can reduce debt.
The company has been consistently giving dividends and also has good repurchase programs in place.

Recent Concerns & Management Commentary

The company is in the midst of negotiations with their labor unions to come up with an agreement for its 340,000 workers. There is a good possibility that the labor costs will increase, if management approves the new requests.
Management believes it can increase productivity so as to cover the increased cost.
Company also faces some macroeconomic uncertainties and changing consumer behaviours that affect demand, and which the management is diligently trying to solve.
Management is also putting a heavy emphasis on modernizing the tech to make the processes more efficient and provide data-driven analytics to optimize the supply chain.