đ UPS: Freight No More?
đ UPS: Freight No More?
UPS is doubling down on its core business while getting rid of underperforming units
Hey Global Investor, here's what you need to know before the US markets open.
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UPS: Freight No More?
United Parcel Service is refocusing on its strategy to double the efforts that drive the greatest value to its customers. Which means getting rid of those parts of the business which are underperforming.
Background: Fifteen years back, UPS had a very different view of its business. As the worldâs largest parcel delivery company, it was competing head-to-head with FedEx in terms of who will deliver more packages for Christmas. With the advent of e-commerce and concomitant perennial growth in parcel deliveries, UPS has raced ahead of FedEx. Today, UPS is roughly twice the size of FedEx, purely in terms of market cap.
Back in 2005, in order to cater to different customer segments, UPS spent $1.25B to purchase a short-haul trucking business unit. The idea was for UPS to become a one-stop-shop for all transportation services. This business unit, UPS Freight, focused on B2B services and hauling large industrial cargo. It counts Honda Motor Co., Home Depot, and Best Buy among its customers.
In June 2020, Carol Tome took over as the CEO and vowed to streamline UPSâ operations under the theme âbetter, not bigger.â And thus, all three segments in which UPS operates â domestic package, international package, and supply chain and freight â underwent a no-holds-barred review.
What is Happening? With sales of $3.3B and employing 14,500 workers in 2019, UPS Freight accounted for ~4.4% of UPSâ total revenue and barely broke even. In the nine months ended September 2020, this unitâs revenue dropped 5.1% Y-o-Y. Enough for Tome to push for selling the business outright so the company can focus on its bread-and-butter package delivery business.
And so, after fifteen years of acquiring and growing UPS Freight into one of the largest less-than-truckload carriers in the US, UPS is selling the unit to Canadaâs TFI International for $800M. As part of the agreement, Quebec-based TFI will continue to provide freight services to UPS as a third-party vendor. The deal will expand TFIâs asset base by 6,340 tractors and 23,400 trailers in 197 facilities and allow it to provide its services across all of North America.
In selling the freight business, UPS will take a $500M charge. This is the bullet the company needs to bite in order to increase return on capital while maintaining its dividend and credit rating. UPS expects the sale to add 0.2% to its operating margin, and hopes to consummate the deal by the second quarter.
Market Reaction:Â On Monday, UPS closed at $161.75, up 1.74%.Â
Company Snapshot đ
UPS $161.75 +2.76 (+1.74%)
Analyst Rating (26 Ratings) BUY 50% HOLD 31%  SELL 19%
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Fun Fact of The Day đ
Iceland has an elf whisperer who inspects construction sites before anything gets built to make sure no elves are hanging around.
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