Business is almost too good at UPS (NYSE: UPS) this year. News reports indicate the delivery service is so swamped with packages that it is sending office workers including accountants and marketers out to make deliveries.
Things are so bad that some UPS employees were using their personal vehicles to make deliveries, Fortune and The Wall Street Journal reported. Even those heroic efforts might not be enough customers outside Atlanta; where UPS headquarters is located, told WSB-TV they were not receiving their packages right before Christmas.
The holiday volume is so high that UPS some news reports indicate UPS is considering raising its rates for the shopping season, Fortune reported. The company is taking some efforts to improve efficiency by placing the largest order yet for Tesla Motors (NASDAQ: TSLA) electric semi.
The company formerly known as United Parcel Service is planning to order 125 of the electric big rigs, Reuters reported. That is the largest order for the next-generation freight transit solution yet. UPS is probably making the move to get around planned restrictions on diesel-powered vehicles in many of the world’s cities.
Can UPS make money?
Such measures will have many people wondering if UPS is making money. The answer provided to that question by financial data is yes.
UPS reported a net income of $1.264 billion; and an operating income of $2.035 billion on September 30, Stockrow data indicates. That created a gross profit of $14.94 billion on the same day.
UPS’s operating income was up from $1.984 billion in September 2016, and the net income increased from $1.257 billion in September 2016. This makes for slight growth at the company.
The figures are good for a company that reported $15.978 billion worth of revenues on September 30, 2017. Revenues at UPS grew by 7.83% during the third quarter of 2017. So yes, UPS is making money but is it generating any float.
How Much Cash does UPS Have?
The float is Warren Buffett’s term for extra cash that a company can use for purposes like expansion, acquisition or pa down debt. In that department UPS, is not doing well; which explains why the company is so interested in potentially money-saving technologies like the Tesla Semi.
UPS reported a free cash flow of just $102 million on September 30, 2017, that figure was down from $1.314 billion in July, and $1.495 billion in September 2016. UPS’s business still generates a lot of cash, it reported $1.797 billion in operating cash flow on 30 September 2017.
The company did have some cash in the bank, in the form of $4.461 billion worth of cash and short-term investments on September 30, 2017. It also had a lot of value in the form of $41.356 billion worth of assets on September 30, 2017.
So yes, UPS generates a lot of cash and some float, unfortunately, it has a hard time keep that cash and float. This makes the delivery giant a potential value investment instead of a value investment.
Is UPS a Value Investment?
There are a few attractive features at UPS including a dividend of 83¢ paid on November 29, 2017. That was impressive, but it might not make the $119.15 share price from December 29, 2017, worthwhile.
My take is that UPS makes money but it is overpriced at $118.64 a share, I would recommend waiting until falls to $100 or so a share to buy. Although it is still a far better deal than FedEx (NYSE: FDX) which was trading at a ridiculous share price of $249.54 on December 29, 2017.
The Danger to UPS
Currently, I’m leery of both UPS and FedEx because of the danger they are in, in a changing retail market. Threats to these companies abound from both new businesses and new technologies.
The biggest menaces are same-day delivery services such as Prime Now from Amazon (NASDAQ: AMZN). Amazon was promising same-day delivery with Prime Now as late as Christmas Eve (24 December) in some markets, a press release indicates. Prime Now is being tested in the Denver area, and it might be rolled out to parts of Florida, Illinois, California, New York, Oklahoma, Maryland, Minnesota, Virginia, Wisconsin, Nevada, and other states, Tech Crunch reported.
Amazon is far from alone, Walmart (NYSE: WMT) is developing an artificial intelligence based shopping assistant called Code Eight, Geek Crunch Reviews reported. Code Eight is supposed to be the basis for a new shopping service for affluent mothers in New York City.
Target (NYSE: TGT) has bought a unicorn called Shipt that offers a similar service for $500 million, CNN Money reported. Shipt uses 20,000 personal shoppers to fulfill orders in 72 markets.
Even more dangerous rivals to UPS in the same-day shipping arena would be Grubhub (NYSE: GRUB), Kroger (NYSE: KR), Deliv, Uber, Alphabet (NASDAQ: GOOG) and Lyft. Grubhub and Uber already have a vast amount of experience in same-day delivery by delivering food. Deliv, Uber, Lyft, Walmart, Alphabet, and Kroger are implementing various store-based same-day delivery concepts.
UPS should consider entering the same day delivery market
It goes without saying that a really smart move for UPS right now would be to buy Deliv or GrubHub. Another would be to form delivery alliances with large retailers like Kroger, Target, or Walmart. An even better move would be to participate in Alphabet’s (NASDAQ: GOOGL) Google Express program.
Same-day delivery is a threat to UPS because it allows retailers to bypass delivery services and interact directly with the customer. Although, UPS and FedEx’s problems this holiday season demonstrate that the logistics of mass delivery are tougher than many people expect.
There are many forces that have the potential to derail same-day delivery, the biggest is labor troubles. Hundreds of thousands of delivery personnel will be needed for same-day delivery and they will be in a perfect position to put a stranglehold on retailers.
How Unions can take advantage of same day delivery
Sooner or later, some smart union official is going to figure out; “that all I have to do is sign up 10% of the same-day delivery people, and have them strike to force retailers to meet all of our demands.” Given the shoddy way Amazon, Walmart, and Target have historically treated their employees, such unionization is probable.
This might give UPS; which is a Teamsters shop, an advantage because it has an established relationship with unions. One thing is clear UPS is going to have to dramatically change its business in order to survive in the evolving e-commerce economy.