UPS is faring better than FedEx lately and we expect to increase our UPS fair value estimate slightly as we tune our near-term volume and margin growth expectations following third-quarter earnings. UPS's 2019 adjusted free cash flow guidance is over $4 billion, whereas FedEx's FCF for the past four fiscal years is slightly negative and we expect no quick turnaround--clearly FedEx investors believe in the eventual returns on strategic investment. This quarter, UPS grew revenue 5% year over year and expanded normalized operating profit by 20%--a strong display of operating leverage and benefits from recent margin initiatives. Still, UPS' overall mix is just over 50% residential deliveries and this gives some pause when considering future margins.
UPS grew consolidated EBIT 20% excluding restructuring expenses, and impressively all three operating segments improved margins: domestic package improved from 9.5% to 10.5%, international package from 16.6% to 19.8% and supply chain and freight margin improved from 7.4% to 7.6%. We think demand for fast delivery was a key success this quarter. Air volume growth was particularly strong: up 24% year over year in next day and up 17% in two-day shipments; ground volume grew 7% and international was flat. Air shipments probably benefited from FedEx's exit from Amazon fulfillment as well as from continued e-commerce expectations and high consumer demand growth, offset by domestic industrial weakness. Consolidated revenue per package declined 1.6% year over year, but we attribute this to mix (lighter packages over shorter distances), though clearly this did not preclude good profitability. The firm grew sales 10% in domestic, held flat in international, and declined 5% in supply chain and freight, mostly due to 12% lower forwarding revenue.
Looking forward, UPS reiterated 2019 EPS guidance but expects a tax rate lower than previous expectations, so we expect operating results are not set to surprise much this year.
UPS is the giant among global parcel shipment companies, and we consider its economic moat to be the widest among parcel carriers. The company crafted its moat by assembling an integrated international shipping network unlikely to be matched by any but a few global players. Despite its extensive unionization and asset intensity, UPS produces returns on invested capital about double its cost of capital and margins well above its competitors'; we credit the firm's leading package density and outstanding operational efficiency. UPS has turned to healthcare markets and developing nations for growth, and we think the company has ample runway left to build speed. The firm is in the midst of an operational transformation initiative designed to address and mitigate challenges of ever-larger online fulfillment demand.
No doubt Amazon's developing its own network of delivery to dense urban destinations takes packages out of the market, and that's not a positive factor for UPS. This poses a great headline risk to share prices, but we think it is unlikely competing retailers will put fulfillment in the hands of archrival Amazon. UPS indicates no customer constitutes 10% of global revenue, whereas FedEx stated Amazon made up 1.3% of sales before it dramatically reduced its exposure when in the summer of 2019 it declined to renew Express and Ground contracts with Amazon.
UPS earns higher margins than its peers, by its mix (FedEx earns a majority of its revenue in its lower-margin express segment) and by funneling substantially greater package volume through its efficient assets. In the U.S., FedEx's express and ground units together handled about 11.1 million average parcels daily in its fiscal 2018, but UPS moved on average 17.5 million daily parcels in calendar 2018. The disparity is even greater in U.S. ground, where UPS moved on average 14.5 million parcels per day and FedEx Ground averaged 57% of that volume (8.3 million) in its most recent fiscal year. We think clients appreciate the convenience of using the same driver to handle both express and ground packages in UPS' single network, but during peak holiday season, FedEx ground's variable cost model shows merit.
UPS earns its wide moat from efficient scale, cost advantage, and the network effect. Extensive express, ground, and freight networks demand a huge quantity of trucks, trailers, terminals, sorting equipment, drop boxes, IT systems, and skilled labor. Replicating these assets in the absence of ample package flow would be costly, and few entities would endure the financial losses during the necessary density-building phase. As evidenced by DHL's worthy effort, such a project would require at least a decade of effort. Even a global shipping powerhouse like DHL failed to displace UPS and FedEx on their massive home turf--these two competitors comprise the efficient scale in high-service U.S. domestic parcel delivery. In this high-fixed-cost business, the substantial parcel volume handled by the incumbents provides a cost advantage that makes competing at market prices difficult for low-volume entrants. Compared with FedEx, UPS produces superior margins via greater package volume, concentration on high-margin ground shipping, and use of a single network rather than parallel air and ground operations. The firm produces attractive ROICs averaging over 20% despite its asset-intensive operations. The firm does have substantial asset-light operations in its freight forwarding and contract logistics operations, and the former boast network effects typical of this model--additional offices make the entire system more valuable to shippers. We believe with near certainty that the firm will outearn its cost of capital for the next 10 years and consider excess normalized returns more likely than not two decades from now; we consider UPS' economic moat to be one of the widest in the transportation universe.
We have increased our fair value estimate for UPS to $111 from $109 as we increased our near-term projections for domestic air shipment growth and profitability in all three operating segments. Within its parcel operations we believe the firm is benefiting from operating leverage and the payback on its operating improvement initiative investments still underway. We also believe that the firm will invest greater capital going forward than in recent years (it was a super-low 4% of revenue, now we anticipate 8%-10% in the next three years) as the firm contends with capacity and margin challenges related to rapid B2C parcel growth. We assume that the firm achieves long-run 11% consolidated margins in 2022. UPS' performance is tied to the health of the global economy, and we believe shipping volume will stay strong for several quarters at this point in the economic cycle, and in the long run we believe overall global parcel shipping market expansion and consistent price increases will enable UPS to increase its top line at a 5% compound annual rate during the next five years. The firm expects to expand international package shipping faster than the broader market through internal growth and by adding assets, particularly within the health care vertical. We expect UPS will generate an impressive high-teens average return on invested capital during the next five years.
Rapid changes in shipping demand during the recent recession demonstrate that the cone of uncertainty surrounding modeling estimates can widen quickly because of macroeconomic factors. UPS derives about a fifth of its total revenue from international sources, but it still relies heavily on the U.S. market. The UPS driver team is unionized, but UPS has had minimal interruptions over its history. However, in late 2018 the LTL freight division declined to accept customer shipments for a brief period due to concerns about an imminent labor strike. The strike did not materialize, but labor uncertainty remains an issue.
Overall, UPS has good corporate-governance policies, and management has done right by shareholders. David Abney assumed the CEO role on Sept. 1, 2014. Abney, 63, is a four-decade veteran of the firm, and we think his experience, in his current role as chief operating officer and prior responsibility as president of UPS International, makes for outstanding qualifications. We think UPS changes CEOs about every seven years or so. During 2018, UPS paid Abney a base salary of $1.2 million and total compensation of $15.1 million. Much of this remuneration was in stock awards ($10.5 million) and option awards ($1.1 million). UPS paid four other named executive officers between $4.4 million and $8.5 million in 2018.
In a break from its historical pattern of promoting to executive roles "lifers" like Abney, UPS in recent years has sought fresh perspective and expertise for multiple senior management roles. Most recently, the firm announced the September installation of Pepsico veteran Brian Newman as UPS' chief financial officer. He replaces Richard Peretz, who, as a 38-year company veteran, was consistent with the firm's prior promotion strategy. The CFO role is clearly a major leadership position in the firm, typically second to only the CEO and at least on par with the chief operating officer in authority and responsibility. We think hiring for such an influential role from outside the firm represents a significant strategic shift that demonstrates UPS recognizes the need for innovative perspective in order to successfully adapt to changes in business mix. Indeed, in the past two years UPS has appointed broadly experienced external executives as chief marketing officer (Kevin Warren from Xerox), president of supply chain (Philippe Gilbert from DB Schenker), and a powerful new role, chief strategy and transformation officer (Scott Price, who held leadership roles at Walmart, DHL, and Coca-Cola). We were surprised in October 2019 when COO Jim Barber, 59, announced his retirement as we assumed he was the CEO heir apparent. Abney served as COO immediately prior to his appointment as CEO. Barber's replacement has not been named at the time of writing this report.
While generous, UPS' compensation does not strike us as egregious, given that it is the world's largest transportation company. The firm generates the highest margins among integrated shippers on $72 billion in revenue (for perspective, the largest railroads produce about $23 billion in revenue, FedEx is over $65 billion, and DHL over EUR 60 billion). UPS consistently generates strong cash from operations and invests in technology and in domestic and foreign assets as well as in dividends and share repurchases. While about one fifth of outstanding shares are Class A stock owned by employees, retirees, and descendants of founders, these Class A shares are somewhat troublesome for nonemployee investors because each Class A share garners 10 votes, compared with 1 vote per publicly held Class B share (per the proxy statement, about 70% of the voting power was held by Class A shares). Also, UPS has a poison-pill provision stipulating that after any investor accumulates 25% of outstanding voting power, voting stock in excess of 25% is reduced in power to one one-hundredth of a vote.
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