(UPS) UPS-Merck Expand Deal

United Parcel Services (UPS), the world’s largest package delivery company, inked a new deal with healthcare giant  Merck & Co. Inc. (MRK) to expand its distribution and logistics services. The companies did not reveal financial terms of the deal.

UPS initially began this alliance in 2003 to transport Merck’s products in the U.S. In 2009, the deal was extended to distribution, storage and transportation of medicines and vaccines in North America. The new contract expands the distribution reach further to certain Asian and Latin American markets as well as emerging markets like China and Brazil.

As a part of the expansion, UPS is constructing a new distribution center in China and Brazil to market Merck products. The company has profound logistics expertise to deliver Merck’s products to several small, mid-sized and large businesses.

Over the long term, UPS will primarily focus on healthcare markets, which could be a significant contributor to future growth.

While the company has its long-term health care plans in place, it is also currently undergoing a series of initiatives to improve its near-term earnings. Key among these is its renewed focus on yield improvement in the U.S. Domestic Package division. Other drivers include increased export volumes, improved domestic pricing, operating leverage benefits on 35–40% capacity expansion at Worldport and the flexible Teamster contract.

Given the long-term goals and current programs, UPS, which largely competes with FedEx Corporation (FDX), is expected to deliver healthy revenue and margin expansion driving earnings per share above previous peak levels. Nevertheless, its near-term results could be dampened by surging fuel prices and intense competition.

We are currently maintaining our long-term Neutral recommendation on United Parcel. The stock retains the Zacks #2 (Buy) Rank for the short term.

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