Morningstar | UPS' Leading Ground Density Is Fueled by Strong Demand for Online Fulfillment
UPS is the giant among global parcel shipment companies, and we consider its economic moat to be the widest among all parcel carriers. The company crafted its moat by assembling an integrated international shipping network unlikely to be matched by any but a few global players. Despite its extensive unionization and asset intensity, UPS produces returns on invested capital about double its cost of capital and margins well above its competitors'; we credit the firm's leading package density and outstanding operational efficiency. UPS has turned to healthcare markets and developing nations for growth, and we think the company has ample runway left to build speed. Even existing operations have revenue expansion potential via pricing power because UPS operates within a somewhat rational oligopoly in its largest market, U.S. parcel delivery.No doubt Amazon's developing its own network of delivery to dense urban destinations takes packages out of the market, and that's not a positive factor for UPS. This poses a great headline risk to share prices, but we think it is unlikely competing retailers will put fulfillment in the hands of archrival Amazon. UPS indicates no customer constitutes 10% of global revenue, whereas FedEx states Amazon contributes under 1.3% of sales.UPS normally earns higher margins than its peers, by its mix (FedEx earns a majority of its revenue in its lower-margin express segment) and by funneling substantially greater package volume through its efficient assets. In the U.S., FedEx's express and ground units together handled about 11.1 million average parcels daily in its fiscal 2018, but UPS moved on average 17.5 million daily parcels in calendar 2018. The disparity is even greater in U.S. ground, where UPS moved on average 14.5 million parcels per day and FedEx Ground averaged 57% of that volume (8.3 million) in its most recent fiscal year. In addition to the efficiency of UPS' single network for express and ground shipping, clients appreciate the convenience of using the same driver to handle both express and ground packages. However, during periods of volume volatility like holiday peak season, FedEx ground's variable cost model shows merit.United Parcel Service provides transportation services, primarily domestic and international letter and package delivery. The company reports its operations in three segments: United States Domestic Package, which includes the time-definite delivery of letters, documents and packages throughout the United States; International Package, which includes delivery to several countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States; and Supply Chain & Freight, which includes the company's Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units.
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