UPS drives growth with international deliveries
Global revenue has increased by double digits over the past few years.
In contrast, the domestic U.S. delivery segment, which is currently the most valuable segment, will see comparatively lower rates of growth going forward. And due to the very nature of UPS's business, its rate of growth in a region is highly correlated with the rate of growth of that region's economy as higher business activity translates to greater business communication and merchandise transport.
From 2007 to 2011, revenues at UPS's international delivery segment increased by 19% while revenues at its domestic U.S. delivery segment increased by only 2%. This trend is likely to continue in future and therefore makes international markets increasingly important to UPS.
We currently have a stock price estimate of $78.44 for UPS, approximately 5% above its current market price.
Growth in international trade
The growth in international trade is expected to continue in the future. In 2010, international trade expanded by 10.8% on a year-over-year basis. Its growth rate declined to 5.0% in 2011 and is forecast to decline further to 3.7% in 2012. This decline is attributable to the slowdown in the global economy due to a number of reasons including the European sovereign debt crisis. However this growth rate is still faster than the growth in domestic production and so supports the outlook international delivery segment.
Emerging markets' growth
Additionally, the fast-growing economies of Asia-Pacific and Latin America offer long-term high-growth potential in their domestic delivery markets. In 2011, the real GDP growth rate of China was 9.5%, of India was 7.8%, of Sri Lanka was 8.3%, of Bangladesh was 7.1%, of Indonesia was 6.4% and of Panama was 7.4%. This is much more rapid than the real rate of GDP growth rate in the U.S. at 1.7%.
Understanding this opportunity, UPS has been steadily expanding in emerging markets. Typically, it enters a new market through imports and exports, then expands domestically with a partner and finally acquires the domestic operations wholly if it sees sustained growth potential. It used this strategy successfully in China where today it is one of the few wholly-owned foreign express carriers.
Further, intra-Asia trade driven by these fast-growing Asia-Pacific economies will continue to be a key growth driver that will add to growth at UPS' international delivery segment.
Taken together, these two trends of expanding international trade and emerging markets' growth explain why the international delivery segment of UPS and not its domestic U.S. delivery segment will drive its long-term growth.
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