United Parcel Service Inc (UPS) (NYSE: UPS) is a global leader in package delivery, specialized transportation, and logistics services. They have more than 400,000 employees globally and delivered more than 4.6 billion packages/documents in 2014 alone. This was in more than 220 countries and territories around the world – this gives us an idea about this industry giant.
One thing is very appealing when looking at UPS’s figures and business activity: of those 400,000 employees that work at UPS, approximately 75%, or around 300,000 of the workforce are in the United States. This signals that the vast majority of their revenue comes in from within the USA, and only around one quarter from overseas activities.
This is both good and bad in the sense that it is a company that should not be too affected by a strong dollar, unlike other US conglomerates that have most of their incomes in other currencies. This is because when they convert the revenue into US dollars, the profits will shrink on the back of the strong currency. Also, fluctuations in interest rate expectations and monetary policy in the United States are not that important for a company like UPS, at least not in the current conditions and during the holiday season.
Nevertheless, UPS’s last report showed third-quarter sales decreased in the middle of a decline in US ground shipments. This proves that domestic shipping is “UPS’ bread and butter”, as analyst Kevin Sterling from BB&T Capital Markets once said.
There can be only two explanations for a decline in ground shipments: 1. Either UPS is losing market share or, 2. the economy is not as great as it seems.
In addition to the statement above, the Federal Reserve of the United States just announced last Wednesday the monetary policy and interest rate decision for the next period and everyone agrees that the outcome of the FOMC (Federal Open Market Committee) was that the possibility of a December rate hike is clearly stronger this time. After the announcement, the US dollar moved strongly to the upside in what seemed to be a bullish break.
This leaves us to conclude that the only logical explanation for the UPS drop in share prices in the last two months, (as shown in the last quarter report), is due to a market share drop in the US. Not a bright outlook for the company’s future sales & revenue figures.
Based on all the above and on the fact that a rate hike is considered a rule of thumb (a negative thing for the general stock market), I am favoring a put option on UPS. This should be played from the current $102/share level, and have an end of November expiration date. Also, by the time December starts, another put option with the end of the month is advised.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
