UPS Expands in Health Care Markets - Analyst Blog

By Zacks | February 07, 2013 AAA

United Parcel Service Inc. (UPS), the leading package delivery company, has announced the expansion of its health care distribution facilities in North America.  The company is seeking expansion in five major markets including Burlington, Ontario, Louisville, Mira Loma, Atlanta, and Reno that brings its total global health care network to 37 dedicated facilities. The company's accelerated health care investment positions it well to tap market opportunity in this rapidly expanding health care business for shipping companies.

Over the years, the company has established various distribution facilities dedicated to health care in key markets like Singapore, the Netherlands, Canada, Latin America, Australia and the U.S. It sees further opportunities in emerging markets like China, India, Japan and Brazil.

As a result, UPS extended its 8-year long partnership in 2011 with pharma company Merck & Co. Inc. (MRK) to expand its distribution and logistics services to certain Asian and Latin American markets. Further, in 2012, the company acquired Italian pharma logistics provider Pieffe Group to enhance its health care distribution networks in North and South America, Europe and Asia.

In the same year, the company announced the opening of facilities in China and Australia to cater to health care distribution in the Asia-Pacific region.

Besides expanding its health care business, the company plans to invest about $500 million toward new technology and facility expansion over the next few years in markets including France, Latin America, Vietnam, China and Korea. In sync with this expansion spree, the company augmented phase 1 of its European hub operations at Cologne/Bonn Airport in Germany to increase capacity by 65%.

The expansion would cost about $200 million, with the entire project slated to be completed at year-end 2013. Overall, UPS projects capital expenditures of $2.4 billion for the year, which is concurrent with its capital spending target of 4% of revenues over the next five years.

We believe these accelerated investment plans arise from the company's optimism in its earnings power and revenue generating capabilities even in a difficult operating environment. Despite the disappointing end of the $6.8 billion mega acquisition of Dutch shipping company, TNT Express and an economic setback that affected demand trend, UPS managed to grow with top and bottom line increases driven by operational efficiency and an enhanced worldwide network.

However, we remain concerned about the volatile economic conditions that continue to restrict market demand. Further, the company is also exposed to unionized workforce and intense competition from giants like FedEx Corporation (FDX).

Other Stock

Air Transport Services Group, Inc. (ATSG), which has a Zacks Rank #2 (Buy) is another stock worth considering in this sector.

UPS has a Zacks Rank #3 (Hold).

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