Yahoo Finance The Benefits of Boring: Investing in Parcel Delivery
- By beulahm
To begin with, United Parcel Service (UPS) is an extremely boring transportation and logistics company that gets a little news time during the holiday season and then once again vanishes into the background. That being said, the transportation industry, which has been around for centuries, is more relevant today than ever, and the segment's best years are yet to come as the world's trade is taken over by e-commerce.
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The intrinsic value of UPS
Worldwide, the e-commerce trade has grown at a rapid pace over the years, and it will continue to do so. As more and more people start ordering their goods online, the need for a proper shipping partner is extremely important. There will be no e-commerce if there is no proper delivery mechanism, and that is not something that companies would be able to do on their own. The case is very much the same for big companies as well, because the bulk of their resources have to go into procurement, warehousing and technology.
Shipping goods is a complex task. It is labor-intensive, the technology has to be upgraded constantly and the fleet has to be maintained, replaced and expanded at regular intervals, which makes it a highly capital-intensive process as well. These are things that even multi-billion dollar trading retail companies would never be able to handle on their own because it clearly falls out of their core area of expertise. Besides, why even bother when you already have companies like UPS and FedEx (FDX) that have an established presence, a well-built and well-oiled network and the technology to support it?
As it stands, retail businesses operate on very narrow margins, which makes it even harder for such companies to build and operate their own shipping networks, simply because the risk versus returns are just not favorable.
Walmart (WMT), Amazon (AMZN), Costco (COST) and Target (TGT) all have operating margins that lie in the sub-6% range. Losing even a couple of percentage points is not an option for these companies when they are in fierce competition with each other. Big retailers are the only ones that have the money to build a transportation company on their own, but the current competitive landscape will not allow them to venture into that area.
Due to this, any e-commerce segment - whether B2B or B2C - will be entirely dependent on shipping companies to complete them. If e-commerce continues to grow, which it will, then transportation and logistics will have to grow. UPS and FedEx control the U.S. market and there is no room for any other competitor to rise in this market.
The U.S. e-commerce market was worth $304 million in 2015 and is expected to reach $500 billion dollars by 2020. The near doubling of the market in five years time is going to fuel the top line and bottom line revenues of both the shipping companies.
It's a boring industry for sure, but one that will stay on the growth path for the next several years. That's something for long-term investors to mull over.
Disclosure: I do not own any of the stocks mentioned in this article.
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This article first appeared on GuruFocus.
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The intrinsic value of UPS
