United Parcel Service (UPS) is the world’s largest express carrier and package delivery company, significantly bigger than archrival FedEx (FDX). UPS stock plunged due to impact from coronavirus, but then skyrocketed amid the e-commerce boom. So is UPS stock a good buy right now? Read on to find out.
Founded back in 1907, the shipping giant offers customers a wide range of supply-chain services, including freight forwarding, fulfillment, customs brokerage, returns and even financial transactions.
Size is key. UPS delivers millions of packages across the globe each day. In 2020 it delivered 24.7 million packages per day on average, up from 21.9 million the previous year. This translates to 6.3 billion packages through the year. UPS also has been investing heavily to adapt to the changing market in the face of the e-commerce revolution.
But while the e-commerce boom has boosted package shipments, UPS earnings growth is not ideal. In addition, the loss of some Amazon.com (AMZN) business and the weak global economy also pose notable risks.
However, in the latest quarter UPS earnings rose on the strongest sales growth in years, as the coronavirus pandemic turbocharges e-commerce.
Delivering so many packages translates to massive revenue. In 2020 UPS generated $84.6 billion in sales. That was a 14% increase on the previous year, and a 37% increase since 2016.
In the fourth quarter of 2020, UPS earnings rose 26% to $2.66 per share. Wall Street had expected UPS earnings to edge down 0.5% to $2.10. It was the third straight quarter of accelerating UPS earnings growth.
Meanwhile, revenue grew 21% to $24.9 billion. This was even better than analyst expectations for revenue growth of 11% to $22.79 billion. Revenue gains accelerated for the fourth quarter in a row.
The shipping giant saw profit margins suffer as online sales soared, due to lower-margin package deliveries to homes.
The company has spent heavily to adapt to e-commerce growth and challenges, a move that eats into profits. Handling the holiday shipping season crush and the ongoing shift to same-day deliveries of online orders is a challenge for UPS and FedEx.
As 2020 drew on, UPS hired more than 100,000 seasonal workers for what it predicted would be a record peak holiday season, beginning in October through January 2021. It applied holiday peak surcharges on packages to offset. The start of coronavirus vaccine shipments in late 2020 made further demands on UPS capacity.
UPS Stock Analysis
The stock formed its latest base while trading below its 50-day moving average. The fact it continues to trade below this key technical benchmark is a concern.
On the plus side, this is a second stage base. IBD research finds that early bases (first and second) are more likely to succeed than later ones.
The relative strength line for UPS stock is slightly lower for the year, but has largely been moving sideways of late. This comes after a period of steeper decline from mid-October until early January. The RS line compares a stock’s performance to the broader S&P 500.
UPS stock is actually down around 4% so far in 2021.
Last year, the stock’s RS line outperformed from late May until the end of September, snapping a downtrend going back to 2002. How it performs could prove whether this outperformance was a blip, or the beginning of a new trend.
It holds a far from ideal RS Rating of 57 out of 99. This puts it in the top 43% of stocks tracked in terms of price performance over the past 12 months.
Earnings have grown by an average 15% over the past three quarters, which is not ideal. Longer term, the EPS picture is not up to scratch for CAN SLIM investors. Earnings have grown by an average 7% over the past three years.
A key question for UPS investors is how much the coronavirus e-commerce boom has permanently changed consumer spending habits.
Increasing revenue growth is coming after years of heavy investment to handle increased e-commerce shipments. If the shipping giant can slow capital spending amid modest revenue growth, UPS earnings growth may return to double digits for an extended period.
UPS Makes These Moves Amid Covid-19
The air cargo industry had been struggling before the outbreak. The International Air Transport Association said demand for air cargo decreased 10.6% in 2020, compared to 2019.
This was the largest drop in year-on-year demand since IATA started to monitor cargo performance in 1990.
Nevertheless, UPS has played a key role amid the coronavirus outbreak after being designated an essential services provider by governments around the world. During the Q4 earnings call, CFO Brian Newman told analysts the company was working hard to meet additional international demand.
“We exceeded our volume expectation with total average daily volume up 21.9%, driven by export and domestic volume growth in all regions,” he said. “We added 365 flights above our normal schedules to support high market demand for our export services.”
The firm’s International segment delivered a record quality operating profit of $1.2 billion, an increase of 43.4% year-over-year. Operating margin also expanded 280 basis points to 24.3%.
UPS Makes Leadership Move
Last March the UPS board appointed Carol Tome as the firm’s new CEO. The 63-year-old had been a member of the UPS Board since 2003, and served as chair of the firm’s Audit Committee. She is also the former executive vice president and CFO of Home Depot (HD).
The firm moved after former COO Jim Barber decided to retire in December 2019. The executive had worked his way through the ranks during a 35-year career at the firm, and had been widely expected to take over as chief executive.
Barber had started his career as a UPS delivery driver, which gave him expertise in all aspects of the business.
Analysts said he had been instrumental in the company’s turnaround. He formerly oversaw the company’s global small-package delivery, freight, supply chain, freight forwarding and engineering. Barber was also credited for leading the firm’s international growth in both mature and emerging Asian and European markets.
UPS Vs. FedEx Vs. Amazon
While UPS and FedEx are archrivals, there are also important differences.
UPS has a focus on serving retail customers and small businesses. They also provide some postal and shipping-related services. However, its specialty is domestic ground delivery services. The growth of e-commerce dovetails with UPS’ core business of small-package delivery. The company manages all of its businesses through a single pickup and delivery network.
FedEx, meanwhile, rakes in over half its revenue from its FedEx Express division. Its specialty is the rapid delivery of time-sensitive mail and packages. The firm delivers around 6 million packages per day to more than 220 countries and territories across the globe.
Both stocks are seeing a potential future rival emerge in Amazon. As online sales grow, Amazon has been expanding its own air and ground delivery network.
Morgan Stanley analyst Ravi Shanker previously flagged the dangers ahead for UPS and FedEx in a research note.
“For now, investors are focusing on Amazon’s last-mile efforts, but we believe the challenge in Air is just as relevant,” he said. “But given Amazon’s plans to take delivery of 40 planes and build an air hub that could potentially handle 100 planes, we’ve taken a closer look at the impact of Amazon Air (its in-house Express Air network) on UPS/FedEx Air volumes.”
Analyst Rates UPS Stock
UBS analyst Thomas Wadewitz is bullish on the prospects of UPS going forward. He holds a buy rating on the stock, with a 205 price target.
“UPS’ 4Q20 earnings report showed it is executing on its strategies including the focus on SMB (small and medium-sized business) customers (28.5% volume growth in 4Q) and quality of revenue/pricing (7.8% Domestic package yield growth),” he said in a research note. “Looking forward, we expect UPS to continue delivering on growth with SMB and also pricing gains and we also anticipate improving cost side performance.”
Wadewitz believes UPS has a “mix of tailwinds and headwinds” for its Domestic Package margin performance in 2021. He also believes there is a “constructive frame” for its international business in the year ahead. He highlighted an easy comparison in the first quarter, and margin expansion opportunities later in the year.
UPS Stock Is Not A Buy
UPS earnings growth is well short of the 25% benchmark IBD research finds to be key to winning stocks. However sales growth has picked up and there are some prospects for slightly faster earning growth.
UPS stock was a winner during the coronavirus market rally, but has given up ground on its highs. In fact it is in negative territory so far in 2021.
While it has formed a new flat base, it remains well short of its buy point. It is also trading below its 50-day moving average.
Buying an index fund would have delivered safer, higher returns than UPS stock over the long term. If you want to invest in a large-cap stock, a comprehensive selection of articles is here.
Bottom line: UPS stock is not a buy at the moment. Investors keen on the stock could add it to their watchlist as they wait for the stock to pass its buy point. But investors should also note that it’s unlikely to be a big long-term winner.
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