United Parcel Service: How to Read Too Much into Changes at the Top

United Parcel Service (UPS) announced big changes at the top of the company’s management structure today.

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United Parcel Service named Chief Operating Officer David Abney as its next CEO to replace Scott Davis, who will remain chairman.

The changes come at a time of intense competition in the industry. The Wall Street Journal explains:

Meanwhile, competition in the shipping industry is likely to increase as a number of retailers like Amazon.com Inc. (AMZN) and Wal-Mart Stores Inc. (WMT) test their own delivery networks. FedEx Corp. (FDX) likely added fuel to that fire when it unveiled plans last month to change the way it charges to ship bulky packages, effectively increasing prices on more than a third of its U.S. ground shipments.

Instead of charging by weight alone, all FedEx ground packages will be priced according to size, which boosts the priced for delivering items as diverse as diapers, shoes and paper towels. The change in pricing could dramatically affect either online shoppers or retailers or both as one of the parties will have to swallow the estimated hundreds of millions of dollars in extra shipping costs.

Citigroup’s Christian Wetherbee and team read between the lines of UPS’s decision:

We believe the move to pick the COO over other candidates for the job, including current CFO Kurt Kuhn who we viewed as a strong candidate, speaks to the company's focus on managing its network through the current and future challenge of explosive ecommerce growth. We believe 2013's peak season highlighted that last mile home delivery remains the single biggest constraint to ecommerce growth and puts UPS and FedEx in a unique position of controlling 80%+ of the country's capacity. Capturing the value of this supply constraint, while fostering additional growth, remains a key challenge to both companies' futures…

We believe investors have some concern that picking the COO over the CFO may shift the capital allocation strategy in favor of network investment over shareholder returns. That said, given UPS's historically consistent and reasonably conservative approach to capital returns we believe little will change.

Shares of United Parcel Service have ticked up 0.1% to $103.68, while FedEx has risen 0.2% to $142.91. Amazon.com has gained 2% to $330.01 and Wal-Mart Stores is little changed at $77.31.