United Parcel Service Inc - Fundamental Investment Case

Qualitative Concerns:

• Competitors such as USPS stealing share by offering lower prices
• One of the major business generators for UPS aggressively developing its own in-house logistics service and luring shippers with deep discounts
• Lots of startups competing directly with UPS in freight logistics have emerged recently and growing rapidly
• UPS failed to keep up with the e-commerce growth, which has resulted in market share loss
• E-commerce, which accounts for a big portion of UPS package volumes, is expected to decelerate

Fundamental Concerns:

• 80% of the business experiencing volume decelerating and 40% experiencing revenue deceleration
• Revenue per package has mostly failed to keep up with base rate hikes due to negative product mix shift
• Growth of low yielding package volume pressuring operating margins
• In our view, UPS hasn't been investing enough in the business which has helped it with higher FCF
• As UPS ramps up CapEx, failure to generate enough FCF may force it to cut dividend
• Analyst estimates at the high-end of guidance seem overly optimistic

Bottom Line: A leading logistics service company facing increasing competition, pricing and margin pressure and market share loss.