Evaluating UPS’s Supply Chain and Freight Segment in 3Q15




United Postal Service’s (UPS) Supply Chain and Freight segment provides major forwarding and logistics services along with financial offerings for companies related to the industry. UPS has the fourth-highest market share in US freight. It shares this position with Old Dominion Freight Line (ODFL). As of 2014, both companies have a market share of 8%.

FedEx Corporation (FDX) enjoys the highest market share in US freight among its competitors, with 16% of the market share. YRC Worldwide (YRCW) holds the next highest piece of the pie, with 14% of the market share. The third position is held by Con-way (CNW), which was acquired by XPO Logistics in October 2015 but held 10% of the market share in 3Q15. Fifth place is shared by ArcBest Corporation (ABFS) and Saia (SAIA), which each have a 6% market share.

UPS makes up 3.59% of the holdings of the Industrial Select Sector SPDR (XLI).

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3Q15 performance

In 3Q15, revenues from UPS’s Supply Chain and Freight segment saw slight upward improvements to $2.4 billion driven by the addition of revenues from its acquisition of Coyote Logistics. Forwarding and logistics revenues recorded a 2.8% increase, which was lower than expected, while freight revenues also declined by 8.6% primarily due to a drop in LTL (less than truckload) tonnage and lower fuel surcharges. LTL industry demand has remained weak and is expected to continue the same trend in 4Q15.

The third quarter of 2015 also saw UPS’s Supply Chain and Freight segment’s operating profits grow to $219 million, despite having to spend $20 million in transaction fees for the Coyote Logistics acquisition. The segment’s operating margins improved by 9.1% in 3Q15.

Meanwhile, the company’s freight forwarding business continued to benefit from quality initiatives while its distribution business continued to build out its infrastructure. Network and pricing improvements also helped drive significant expansion in operating profits. Revenue growth rates were affected by negative changes in fuel surcharges, soft market demand, and selective pricing initiatives.

4Q15 expectations

For the fourth quarter of 2015, UPS expects its Supply Chain and Freight segment to grow by 7%–9%, driven by revenue actions in its forwarding unit and the addition of revenues from Coyote Logistics. The segment’s operating margin is expected to be about 8%.

In the next part of this series, we’ll take a closer look at what UPS stands to gain from the Coyote Logistics deal.


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