United Parcel Service (UPS) is the world’s largest express carrier and package delivery company. It’s bigger than archrival FedEx (FDX). UPS stock plunged due to impact from coronavirus, but then skyrocketed amid the e-commerce boom. But is UPS stock a good buy right now?
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 2019 it delivered 21.9 million per day on average. This translates to 5.5 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 revolution has boosted package shipments, UPS earnings growth has been sluggish of late. 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 2019 UPS generated $71.86 billion in sales. That was a 3% increase on the previous year, and a 27% increase since 2015. However, income slipped 7% to $4.44 billion.
In the third quarter of 2020, UPS earnings rose 10% to $2.28 per share. Wall Street had expected UPS earnings to fall 12% to $1.82 per share.
Meanwhile, revenue grew 16% to $21.24 billion. This was even better than analyst expectations for revenue growth of 10% to $20.08 billion. It was also the third straight quarter of accelerating revenue growth.
E-commerce continued to boom, however the firm reported also saw a drop in U.S. profits and lower margins due to increased deliveries to homes. These are are less lucrative than deliveries to businesses.
Full year earnings views for UPS continue to improve. They are now seen rising 2%, while they had been seen slipping by as much as 27% drop in 2020. Earnings are then seen rising 10% in 2021. CAN SLIM connoisseurs look for 25% growth in winning stocks.
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.
UPS plans to hire more than 100,000 seasonal workers for what it predicts will be a record peak holiday season. The workers will “support the anticipated annual increase in package volume that will begin in October 2020 and continue through January 2021,” UPS said last month.
Capital expenditures hit $6.38 billion in 2019. This was mostly invested in new technology, aircraft and automated capacity. The firm has long been working to improve its same-day offerings, such as its 2016 investment in last-mile, same-day delivery service Deliv, though these investments should pay dividends in the long run.
The firm is looking to cut its capital expenditures budget to $4 billion in 2021, which compares to a spend of $5.6 billion in 2020.
UPS Stock Analysis
After plunging from early November to mid-March, UPS stock rallied for several weeks but then slumped again. UPS then started a powerful move in mid-May, eventually breaking out of a cup-with-handle base. The ideal buy point was 110.59, MarketSmith analysis shows. It is now well extended from that entry, but has yet to form a new base.
It has been trading tightly of late, so a new base could be forming. One note of concern is the stock is off recent highs, and has been struggling to hold above its 50-day moving average.
The relative strength line for UPS stock has been falling of late. This follows a strong rally from mid-May until late September. This period of outperformance snapped a downtrend going back to 2002. The RS line compares a stock’s performance to the broader S&P 500.
The stock is up more than 44% so far in 2020. The RS line tracks a stock’s performance vs. the S&P 500; it is the blue line in the charts. The stocks gains of late have netted the stock a strong RS Rating of 88 out of 99. This puts it in the top 12% of stocks for stock market performance over the past 12 months.
UPS stock has an very strong IBD Composite Rating of 97 out of 99. It has been improving in this crucial metric. Stock market performance is currently outshining earnings, IBD Stock Checkup shows.
Over the past three quarters, UPS earnings have been flat, but the have accelerated for the past two quarters.
Longer term, the EPS picture is also not up to scratch for CAN SLIM investors. Earnings have grown by an average of 8% over the past three years.
A key question for UPS investors is how much of 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 air cargo demand fell 3.3% in 2019. This is the worst showing for the sector since 2009 and its first decline since 2012.
But UPS has played a key role amid the coronavirus outbreak after being designated an essential services provider by governments around the world. During the Q2 earnings call, CFO Brian Newman told analysts the firm “leaned into three significant changes in demand in the markets we serve,” which helped the firm achieve its successful quarter.
Firstly, the firm shifted air capacity to where it was needed. It met demand for more capacity by flying about 635 extra flights. This enabled UPS to meet “strong demand” out of Asia.
Management also said the U.S. e-commerce market jumped 34.4% during the quarter, with small and midsize businesses quickly adapting. The firm flagged the fact that its digital-access program captured 120,000 new customer accounts, which was a “significant increase from recent trends.”
The firm said its health care expertise enabled the company to meet the urgent need for PPE and Covid-19 testing supplies, as well as providing support for vaccine and treatment studies.
UPS Acts Amid Leadership Turmoil
UPS stock tumbled in October on news that then-COO Jim Barber intended to retire in December 2019. The executive had worked his way through the ranks during a 35-year career at the firm, and was widely expected to take over as chief executive in the future.
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 currently oversees 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.
In March the UPS board appoints Carol Tomé 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).
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.”
Amazon Electric-Vehicle Plans Show Ambitions
And in a Sept. 23 research note, Shanker noted Amazon CEO Jeff Bezos’ carbon neutral “Climate Pledge” could put further pressure on UPS and FedEx. It includes a plan to purchase 100,000 electric delivery vans from Rivian.
The first prototypes are expected to be on the road by next year, with all 100,000 vehicles expected to be deployed by 2024. Electric or not, that’s a lot of delivery vans for Amazon.
“It is a new benchmark for the scale of AMZN’s (Amazon’s) internal logistics operation. AMZN has already placed orders for 20,000 Sprinter vans in 2018 after their previous 5,000 van order,” the analyst said. “The Rivian order represents a step-function change in AMZN’s last-mile fleet.
Shanker pointed out that UPS, by comparison, has 123,000 ground delivery vehicles globally. He believes Amazon could have a bigger last-mile fleet than UPS by 2024.
He also said Amazon’s green initiative could force global parcel/logistics companies to follow a similar policy.
Nevertheless, Stifel analyst David Ross believes it will be a while before Amazon becomes a shipping rival, pointing out the e-commerce giant is currently “adding to the network density of UPS, not taking away from it.”
He does believe, however, that it could become a threat over the longer term.
“Over time, the picture will change and Amazon could become more of a competitor than a customer, but for the next couple years at least, we see UPS helping Amazon,” he said.
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 210 price target.
“We expect a further acceleration in pricing over the next several quarters which along with cost savings and a cyclical improvement in mix (rising Industrial Production and B2B volume) should support Domestic margin expansion in 2021/ 2022,” he said in an Oct. 28 research note.
He also sees good potential for share buybacks as the firm plans for much lower capital expenditures in 2021.
“We expect UPS to focus on debt pay down in 2021 but our forecast of strong free cash flow would provide potential for significant share buyback in the future,” he said.
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, but sales growth has picked up and there are some prospects for slightly faster earning growth.
UPS stock has been a winner in the coronavirus market rally. After a strong run, UPS is extended well beyond its most recent buy point, but it is now forming a flat base with a 178.11 buy point.
Still, 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.
Someone looking for true market leaders should check out IBD Stock Lists, including the IBD 50 list of top-performing stocks.
Bottom line: UPS stock is not a buy at the moment. Investors interested in the stock should watch how the base continues to take shape and wait for a breakout past the buy point. But investors should also note that it’s unlikely to be a big long-term winner.
YOU MAY ALSO LIKE:
These Are The 5 Best Stocks To Buy And Watch Now
Check Out IBD’s New Investing Podcast For Exclusive Trading Tips And Market Insights
Get Timely Buy & Sell Alerts With IBD Leaderboard
Find The Latest Stocks Hitting Buy Zones With MarketSmith
This Is The Ultimate Warren Buffett Stock, But Should You Buy It?