United Parcel Services (UPS) has increased its freight rates by 4.9% on all ground, air and international shipments. The increase is effective January 2, 2012.
The company offers a variety of less-than-truckload (LTL) and truckload (TL) services to customers through its Freight segment, which remains a significant revenue contributor. Despite the current economic volatilities, the broader market and the company remain well positioned to benefit from firming industrial fundamentals and the LTL industry pricing discipline.
Continued focus on pricing improvement signifies United Parcel’s initiative to better its earnings power over the next several years. United Parcel hiked its general rate by 4.9% for ground packages, air express and U.S. origin international shipments, effective January 2011.
The company also raised its freight rates by 6.9% on non-contractual shipments in the U.S., Canada and Mexico from August 1 in an effort to solidify revenue generation along with yield expansion in the three product lines. Likewise, the current price hike should also support United Parcel’s long-term goal of robust revenue and margin expansion plus earnings improvement.
Apart from the routine rate hikes, United Parcel has a series of initiatives underway that is expected to deliver industry leading margin and earnings growth over the long term. Key among these is a renewed focus on yield improvement in the U.S. Domestic Package division. Other drivers include increased export volumes, operating leverage benefits on 35%–40% capacity expansion at Worldport and the flexible Teamster contract.
Further, the company continues to expand its footprint in emerging markets such as health care, which could be a larger contributor to growth in the future. The new contract expands the distribution reach further to certain Asian and Latin American markets as well as emerging countries like China and Brazil.
We believe the growth initiatives will aid the company to deal with near-term headwinds such as surging fuel prices, substantial capital investment and high labor unionization. These would give United Parcel a competitive advantage over its peers like FedEx Corporation (FDX).
We are currently maintaining our long-term Neutral recommendation on United Parcel. The stock retains the Zacks #3(Hold) Rank for the short term (1–3 months).
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