Analysis - declining cash levels could lead Maersk on a $5bn new equity quest
I have been thinking a lot about the cash and liquidity profile of Denmark’s AP ...
I recently watched a CNBC interview in which it was claimed that FedEx has invested far more heavily in infrastructure than UPS over the years, and given that there’s some truth in it, I turned to my banking sources to ask what we should expect from UPS at a time when it – as well as its rivals – is struggling with holiday shipping delays.
Fortune recently noted that “2017 has seen a surge in online shopping – with Cyber Monday setting records as consumers spent $6.59bn, a nearly 17% increase over last year”, adding “that has taxed the infrastructure of shipping companies, particularly UPS, which handles shipping for Amazon, Walmart, and other major retailers”.
UPS has found it more difficult to deliver value to shareholders lately, a fate that does not appear to have been shared with by its customers. For example, Walmart has reported impressive quarterly figures this year which have contributed – alongside a much wiser startegy in China as well as domestically – to almost double its share price since the end of 2015, and its run seems unstoppable.
Seasonal trends, M&A
Do not write off UPS, though. It was a loser in recent weeks, and delays have something to do with that, but they could also be a trivial issue in the larger scheme of things.
One of my sources on the ground told me that “it’s been crazy to keep up with air cargo schedules for months, for everybody, and it is getting really wild now, but delays should always have been expected, and the likelihood is it could get worse before Christmas”.
Is it legitimate to wonder how this situation will affect UPS? I think so.
“If anything, it might not take long before it hits the M&A trail again,” one dealmaker based in New York told me last week, and it would likely do so, she argued, “in order to shore up its less profitable but strategically important operations”.
Meanwhile, another banker in mainland Europe warned me to “prepare for yet another year of much speculation and possibly little action, unless UPS sets its eyes on Royal Mail”. [On this matter, let me just flag up that Royal Mail’s stock has risen 15% since I wrote that it could be attractive for FedEx, but less so for UPS, given its latest strategic moves.]
“Certainly, UPS is sniffing around assets in Europe and the UK, and there is a greater sense of urgency in Sandy Springs [where UPS is based] because it is likely that this peak season will turn out to be disappointment, and that could show in its next trading update, despite management saying the dust has settled,” my source in the US added.
Admittedly, UPS stock has been increasingly volatile after reaching a record high earlier this month, but that is something we are used to towards the end of each year, and doesn’t bother me.
Nonetheless, in order to be better prepared to face future challenges, UPS soon might decide, once again, to deploy capital relatively in its “Supply Chain & Freight” (SC&F) operations.
Seasonal trends, M&A
UPS has been active acquiring assets in recent years. If you run the ruler over its financial results, you’ll notice that all its units are firing on all cylinders, but SC&F, in particular, has benefitted from M&A.
It acquired Coyote Logistics for $1.8bn two years ago just months before messing up its holiday season planning, while earlier this year it snapped up Freightex, a UK-based asset-light provider of truckload, less-than truckload and specialised over-the-road services.
In June 2017 it announced the bolt-on acquisition of Eirpost Group Unlimited Company (aka Nightline), an Ireland-based express delivery and logistics company, which it said “was not material to our consolidated financial position or results of operations”, but a bigger commitment was required in December 2016 when it acquired Maze 1 Limited (aka Marken), which provides supply chain solutions to the life sciences industry and clinical trials material storage and distribution.
This deal was sealed for $570m, and the target’s financial results are included in the SC&F segment from the date of the acquisition.
I do not have specific targets in mind, but most of my sources agreed bolt-on deals of up to $3bn remain more likely than larger acquisitions in 2018, and it is possible that SC&F, which is less profitable than its other two core units, will be where it bulks up inorganically, although its international package activities’ profitability is 18.1% against SC&F’s 7.5%.
“There will be another deal aimed at shoring up either unit as soon as the first quarter, but the cash outflows from pension could dictate how much capital will be allocated to such activities… and you rightly bet the comparison between FedEx and UPS doesn’t make much sense to me,” my banking source concluded.
Is there a gap to close with FedEx?
They both have annual sales above $60bn, but UPS’s 2015-2020 headline capex average is structurally lower than FedEx’s.
However, these numbers taken in isolation mean very little – there are other considerations to be made, such as the asset mix, and capital invested in acquisitions such as FedEx’s purchase of TNT Express, which was heavily underinvested – and also because UPS is a well-oiled machine and is structurally more profitably in terms of underlying operating earnings than FedEx.
Also worth a mention, from a purely financial perspective, is that UPS stock has a yield of 2.7% against FedEx’s 0.8%, on a forward basis, which is significantly more enticing for an investment whose appeal hinges more on expected income streams from dividends than capital appreciation potential.
Their capital structures are not too different either, while net leverage (net debt/adjusted operating cash flow) is also in the same ballpark, and UPS has the money to spend big to bolster its market value, which at over $100bn is already far greater than FedEx’s and DP-DHL’s.
Finally, its group financials have not changed much in the past few quarters – since I wrote “declining UPS share price overlooks strong fundamentals”, its stock has reached a record high of $125.1, and there appears little limit to further growth in 2018, assuming consumer trends remain unchanged and regardless of whether more delays occur or not in the run-up to Christmas.