Unlike other industries, the coronavirus’ impact on parcel delivery services has been more nuanced. The drop in volume for the traditionally more profitable B2B segment has been countered by the massive increase in B2C deliveries, which are typically more margin tight. So much so, these companies are finding it difficult to meet demand.
This is true of package delivery giant United Parcel (UPS). In normal times, the mix between B2C and B2B is evenly split, but by the end of March, the pandemic resulted in the B2C segment boasting 70% of delivery volume.
In a recent note to clients, Credit Suisse analyst Allison Landry ponders how the increasing volume in a less profitable segment impacts UPS.
Landry said, “UPS is at an existential crossroads with COVID having pulled forward what was initially expected to be 8-10 years of B2C/residential mix into just a few short months… The margin erosion from higher cost B2C has long been problematic – amplified by the massive upswing in capex required to more efficiently handle these volumes – but the good news, in our view, is that the profound pandemic-driven acceleration in mix will force a permanent, structural pricing tailwind in the domestic parcel market.”
The other good news, according to Landry, is United Parcel’s recent appointment of new CEO Carol Tomé. The ex-Home Depot CFO brings with her extensive experience, a proven track record, as well as a reputation for improving performance. Tomé was instrumental in making Home Depot one of the best performing retailers following the 2008-2009 financial crisis.
Tomé will have her work cut out for her, as she seeks to boost the company’s profit margins. Not least, the new CEO must improve the pricing structure, deal with Amazon’s impact (both as a customer and competitor) and placate its drivers, who were disappointed with the two-tier payment structure established by former CEO David Abney.
For now, Landry’s Neutral rating stays as is, although her price target for UPS got a lift – boosted from $101 to $118. The new figure implies modest upside potential of 4%. (To watch Landry’s track record, click here)
Landry’s rating has the rest of the Street’s backing. UPS’ Hold consensus rating is based on 6 Buy ratings, 7 Holds and 3 Sells. However, the average price target is more pessimistic than the Credit Suisse analyst’s, and at $102.62, suggests shares could decline nearly 10% over the next 12 months. (See UPS stock analysis on TipRanks)
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