What would UPS have been like without the IPO?
I doubt the company would have managed as much international expansion without it; capital expenditures would have been lower, and the debt load might have been higher. That would have made it more subject to fluctuating interest rates; UPS could have found itself with debt rolling over and markets so dried up that it was extremely difficult to re-finance. That would have been a very bad thing.
If you look at UPS and compare the domestic to international results for the most recent quarter, you see that operating margins on the international side are almost 17 percent, compared to 10.1 percent for domestic operations. It is also about to open a million-square-foot distribution center in China. Things like that would have been difficult for it to finance without going public.
UPS stock is trading below what it opened at 10 years ago, and has not budged in price in nine years. What's your take?
If you look at that 10-year chunk as a whole, it's been a terrible period for equities, unless you happened to buy Google or some other growth stock. UPS is actually running a little ahead of the S&P 500. If you look at UPS' market cap compared to FedEx, it's much bigger [$58 billion for UPS versus $26.1 billion for FedEx]. The forward price/earnings ratio, based on projected future earnings, for UPS is 21 compared to 17 for FedEx. So while the FedEx stock price has appreciated much more, the market clearly favors UPS on some counts.
The delivery sector is such a leading economic indicator. When the global economy is in recession, the last thing you want is a lot of UPS or FedEx in your basket. Both went down pretty hard, both have had pretty good recoveries and both are positioned to do well when recovery comes. UPS, for example, is talking about $1.4 billion in annual savings; that's a lot of money.
I don't think stock performance over 10 years is a significant indicator of the present strength of the company. Cost controls, good operating margins, and careful management got UPS through the recession in pretty good shape, and there has been improvement in the stock price over the last year.
Was going public good for the company?
I know employee ownership has been important to UPS over the years. UPS often pointed to it as a big part of its culture. But at some point, with so many employees, you want to give them a way to trade their stock.
In 1999, remember, the economy was in the throes of the Internet and electronic-age boom. The world was changing at just incredible speed, like a new industrial revolution, times 10, in a very compressed period of time. It was reasonable to say, "Let's give ourselves all the financial flexibility we can get." Based on what was going on in world, going public was a reasonable decision.
How important was the IPO, considering it was only 10 percent of equity?
That's common for a very mature company; rarely do you see a firm of this magnitude put a significant portion of equity on the market at once. Doing so would risk lowering the price of the stock. Putting only 10 percent of the company on the market gave UPS a way to make the change slowly and to control the pace of things. In fact, you could say it was a fairly aggressive amount, since they raised almost $5.5 billion.
Was moving beyond the core business of delivering packages into supply-chain management and logistics a good idea?
Yes, and a well executed one. Third-party logistics has been one of the fastest-growth sectors in the world. Because UPS already owned a big piece of the process, in the final delivery trucks, it made a whole lot of sense to add logistics services. If you look at the most recent quarter, the UPS supply-chain business is doing pretty well, considering the recession — $2 billion in revenues.
It doesn't matter that profit margins are lower in the logistics business than in package delivery. This is a highly competitive service area, where people watch costs closely; you can't expect high margins. If anything, UPS can almost give away logistics services to tie customers more closely to its core services. Customers are less likely to switch to FedEx or DHL for final delivery if they have UPS helping them with the logistics all along the way.
In 2008, the company announced it planned to spend $10 billion to repurchase shares and to increase its debt. Was this a good move?
There was a lot of that going on; share buybacks are a common way to increase return on equity. UPS also had some expenditure needs, like that huge complex in China. As far as the debt goes, the ratio of long-term debt to total capital is still reasonable [50 to 60 percent], and interest rates are low. You are seeing a lot of companies borrowing just to lock in low interest rates.
If you look at investment-grade corporate bond market, there were a vast number of offerings once markets loosened up. It's just like refinancing a mortgage when interest rates go down. If you and I can do that, imagine what UPS can do. Although S&P lowered the company's bond ratings a bit from AAA in 2008, to AA-minus, when it decided to take on additional debt, UPS maintained investment-grade status.
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