United Parcel Service: Not The Best, But Still Worth Considering

Summary

• United Parcel Service has generally fared well in recent years, even though financial performance has been rather volatile.
• The company is experiencing some weakening so far this year, but shares are trading on the cheap.
• They aren't as appealing as its largest rival, but they are still attractive enough to warrant consideration by investors.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

Spencer Platt/Getty Images News

If the world population continues to grow and if e-commerce is slated to continue taking up an ever-larger part of our consumer activities, then the package delivery industry should very well make for a great long-term opportunity for investors to consider. It is true that current economic conditions are looking rather unfavorable in many respects. It wouldn't be a surprise even if the e-commerce space, like many other industries, suffers as a result. But in the long run, the companies that operate here should perform quite well. One player in this industry that has proven itself to be a behemoth is United Parcel Service (NYSE:UPS). Although profits and cash flows can be rather lumpy from year to year, the firm continues to expand its top line as it handles more and more packages. Given near-term risks opposed to the economy, combined with a real likelihood that an economic downturn could impair pricing, United Parcel Service may see additional downside. But considering that shares are already near their 52-week low point and factoring in how affordable the stock is, I do believe that some upside potential does exist in the long run. Because of this, I have decided to rate the firm a soft 'buy' at this time, reflecting my belief that it's likely to outperform the broader market for the foreseeable future.

A great play on e-commerce

Most people, especially those located in the US, have heard of United Parcel Service at some point. Since its founding in 1907, the company has dedicated itself to delivering packages and offering global supply chain management solutions. While the company's focus is most certainly on the domestic market, it is also true that it has operations all across the globe, including throughout Europe, India, the Middle East, Africa, the Asia Pacific region, and Latin America. Using data from the 2021 fiscal year, the business provided shipping services to roughly 1.7 million customers daily, delivering those goods to 11.8 million package buyers every day.

If this all sounds like a herculean task, it's because it is. To get to this point, United Parcel Service has had to make significant investments over its entire lifetime. Today, the company's global network is extensive. Under the global small package category, the company has created 188,000 entry points where customers can tender their packages to the enterprise, after which those packages are sent through the company's extensive network to ultimately arrive at their final destination. Thanks to its massive reach, the firm has become a global player, with operations and roughly 140 different countries. But this doesn't change the fact that its primary emphasis is on the domestic market. Of the roughly 25.2 million packages that the company delivered each day, on average, in 2021, 17 million involved the firm's U.S. Domestic Package segment.

Of course, United Parcel Service does have other segments worth mentioning. Next in mind, we have the International Package segment, which consists of its small package operations throughout Europe, the Asia Pacific region, Canada, Latin America, and a variety of other regions. The firm is currently able to deliver packages to 80% of the European population through its network. The Asia Pacific region is ultimately very important as well, with more than 40 countries and territories through more than two dozen alliances with local delivery companies being serviced by the business. And also, we have a much smaller Supply Chain Solutions segment. This includes the companies forwarding, truckload brokerage, logistics and distribution, Roadie, UPS Capital, and other business operations. To put it in context just how large each of these segments are, consider that in 2021, 62% of the company's revenue and 50.2% of its profits were associated with the U.S. Domestic Package segment. 20.1% of its revenue and 36.3% of its profits came from the International Package segment, while 17.9% of its revenue and 13.5% of its profits were associated with the Supply Chain Solutions operations.

Author - SEC EDGAR Data

Over the past five years, the management team at United Parcel Service has successfully grown the company's top line year after year. Revenue has risen from $66.59 billion to $97.29 billion over that five-year window. Much of the activity here came from the U.S. Domestic Package and International Package operations. Under the former, the company saw the average daily package volume rise from 16.92 million to 21.46 million. And under the International Package segment, package volume grew from 3.11 million to 3.79 million. Another driver of growth has been an increase in pricing. Between 2017 and 2020, U.S. Domestic Package revenue per package increased from $9.48 to $9.92. Although this may not seem like a significant increase, when applied to the kind of volume the company achieved in the 2020 fiscal year, price increases alone would have contributed $3.40 billion to the firm's revenue growth over what it saw in 2017. Then, in 2021, pricing rose even further, hitting $11.06 per package on average. Internationally, pricing rose from $16.22 to $16.99 in the four years ending in 2020. And in 2021, pricing spiked to $19.44.

Author - SEC EDGAR Data

Author - SEC EDGAR Data

This increase in revenue has been great for the company. But profits and cash flows have been rather volatile. Between 2017 and 2020, for instance, net income for the company actually decreased year after year, dropping from $4.91 billion to $1.34 billion. Admittedly, most of this decrease came from 2019 to 2020 because of the COVID-19 pandemic. It's also true that profits surged to $12.89 billion in 2021. In my opinion, a more accurate barometer of the company's success would be its cash flow. However, as the first chart in this article illustrates, this has also been volatile. Even if we adjust for changes in working capital, we would see a decent amount of volatility here. At the same time, it is true that from 2019 through 2021, we did see a consistent increase year after year, with the metric climbing from $8.48 billion to $15.65 billion. Similar volatility to what we saw with net income can also be repeated when looking at EBITDA. But thanks to stronger pricing in the 2021 fiscal year, it too hit an all-time high for the firm of $19.22 billion.

Author - SEC EDGAR Data

For the 2022 fiscal year, the picture is looking rather interesting. For starters, revenue at the company does continue to increase. In the first half of the year, sales came in at $49.14 billion. That compares favorably to the $46.33 billion reported the same time one year earlier. So far this year, the company has actually seen the volume of its U.S. Domestic Package segment decrease, with average daily packages transported declining from 20.43 million to 19.71 million. However, we did see this offset by a rise in pricing from $10.95 to $12.12. A similar trend can be seen when looking at the International Package segment, with volume dropping from 3.76 million packages per day to 3.46 million, while pricing rose from $18.91 to $21.29. This trend suggests to me that the firm has reached a limit in the near term for how much it can charge and as supply chain issues and other factors have resulted in volume declines.

Author - SEC EDGAR Data

Profits, meanwhile, have proven once again to be all over the place. This decline came even as total operating expenses fell from 87% of revenue to 86.2%. Instead, it was driven by investment income and other items decreasing from $3.96 billion to $648 million. The lion's share of this change seems to have been attributed to a re-measurement of benefit obligations that previously increased the company's bottom line the same time last year. But that doesn't mean that other profitability metrics came in strong. For instance, operating cash flow fell from $8.45 billion in the first half of the 2021 fiscal year to $8.29 billion at the same time this year. However, if we adjust for changes in working capital, it would have risen from $7.59 billion to $8.45 billion. But this is the only time in which profits or cash flows seem to have increased year after year. This is because EBITDA for the company also worsened, dropping from $11.55 billion to $9 billion.

Author - SEC EDGAR Data

Despite these troubles, management does have some pretty high hopes for the 2022 fiscal year as a whole. They currently anticipate generating revenue of roughly $102 billion. If this comes to fruition, it would translate to a 4.8% increase over the $97.29 billion in sales achieved in 2021. No real guidance was provided when it came to profitability. But if we annualize results experienced so far for the year, we should anticipate net income of $9.51 billion, adjusted operating cash flow of $17.41 billion, and EBITDA of $14.99 billion. As you can see in the chart above, this results in pricing from a price to earnings perspective and an EV to EBITDA perspective that is higher than what the company was priced at using data from 2021. Meanwhile, the price to operating cash flow multiple seems to be declining. All of this pricing though is lower than the pre-pandemic year of 2019. Although the uncertain market conditions we are dealing with may cause some worsening in the company's top and bottom lines, I have a difficult time believing we could go back to that kind of performance. After all, e-commerce continues to expand and will likely continue with that trend for many years to come. Even if the worst does come though, the company would likely be only slightly overvalued.

In terms of relative valuation, I did compare the company to the only true comparable that it has. That would be FedEx (FDX). Using data from the 2021 fiscal year, FedEx is trading at a price-to-earnings multiple of 14.3. The price to operating cash flow multiple would be 7.8, while the EV to EBITDA multiple would come in at 7.2. These numbers are all lower than what United Parcel Service is trading for using data from that same year.

Takeaway

Based on the data provided, I do think that the long-term outlook for United Parcel Service is still solid. It's a quality enterprise that should continue to benefit from a globalized world. Even if financial performance reverts back to what it was prior to the pandemic, which I think is improbable, shares would likely not be all that pricey. Perhaps they could warrant some downside in that scenario. But any turn back to that kind of performance would almost certainly be temporary in nature. Long term, growth is on the horizon for United Parcel Service and this should lead to higher trading multiples than what the company is experiencing today. Having said that, I do also believe that FedEx is the superior play here because of pricing. But for investors who don't mind paying a little bit more for an ownership stake in one of the two big industry leaders, United Parcel Service should definitely make for a soft 'buy' prospect at this time.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[User 57042378]

The article is too optimistic. I expect heavy headwind here which will probably manifest in very bad earning and outlook tomorrow. I see potential for a 20% or steeper drop until end of the year.

[mmarek evans]

good article... bot ups as the ups/spy pair seems to have found support on a 3yr uptrend ... on absolute basis close above 153.09 confirms...am wrong with close below 154.87

[sbwiad33]

Thats a nice article and a very smart title caught my eye.

[Yanks56]

Reversion to the mean. Volumes will remain historically elevated but the pandemic EPS fluff will be shaken out

[Yanks56]

The time to have sold was at the end of July. Q2 will be the last quarter to reflect pandemic volumes. It will also be the last quarter of benign economic conditions

[kemokelso]

Like this from the author:

"Since its founding in 1907, the company has dedicated itself...The company's focus... all sounds like a herculean task, it's because it is. To get to this point, United Parcel Service has had to make significant investments over its entire lifetime."

Yup, you got it. May it continue. Long UPS.

[rsphillips]

Enjoyed your article.
What would be a good initial investment price for a DG investor

[MoneyPig]

No rush to buy here. The stock surged on the pandemic farce and is yet to fully collapse. AMZN didn't disappear either. And it seems certain non-operating "obligations" have an impact on earnings. So, there are liabilities on the balance.

Biggest risk here is overpaying on e-commerce hype.

[billrla]

UPS needs to stop forwarding undelivered packages to UPS stores or third-party locations unless the recipient specifically requests this "service." Apparently, UPS offers a lower-cost class of service to shippers that does not allow for re-delivery to the recipient's residential address after one attempt. Unfortunately, the end-cutomers winds up having to chase down his or her package by driving to some inconvenient location.

This is the sort of technology-enable "service" that undermines quality and annoys long-time customers (and shareholders), such as myself.

[kemokelso]

@billrla the morning UPS initiated this new service utilizing"access points"
The Bloomberg scroll said...
... "UPS’s answer to you not being home? Go fetch it yourself!."

If the driver doesn't complete the delivery on the 1st attempt, profit per piece goes toward zero.
Add the fact of the new competitor Amazon innovating by simply taking a photo (GPS stamp) to successfully complete delivery. So, UPS had to innovate, as well, or follow in creating new industry standards to ensure profits.

[Clearview60]

Have been excited since day 1 when Ms. Tome took over the reigns at UPS.

[BigLRP]

@Clearview60 agree. A statement by you as to why would be helpful to all.

[Always Bullish]

Long UPS. Fabulous investment with superior management but too expensive right now.

[Steak King]

Nice research but what it lacks is have you shipped or received a package between the two? FedEx is always late by a day or two so if I'm picking between the two I'm on UPS.

[OverTheHorizon]

Nice work with the numbers but the trend is down. In the long run—if it’s long enough— most stocks go up; unless you’re Sears, Braniff Airlines, Bethlehem Steel etc.

[Hewes]

Fedex slashed guidance for 2022 as all metrics were adverse. UPS reaffirmed guidance for 2022.

Do you think there is a reason Fedex trades at a lower multiple?

[Yanks56]

@Hewes Look at the respective operating margins

[Hewes]

@Yanks56 Understood. It was a rhetorical question.

[ToHealthWealthWisdomLongevity]

For years it used to be the common wisdom that the non-union status at FedEx was a strong advantage. With the current tight labor market, that appears to have been turned on its head. Much of FedEx's current problems stem right back to its inability to staff its operations, and the low quality of hires that it has to use. In most areas now, the available workers, both unemployed and the potentially poachable by UPS from other lower paying employers, are drawn to the higher wages, better benefits, safer working conditions and more secure prospects for Teamster jobs at UPS. I am seven months away from a secure retirement after forty-six years with one employer: UPS.

[kemokelso]

@ToHealthWealthWisdomLongevity Bravo!

[DOUGUPS]

@ToHealthWealthWisdomLongevity I am also retired from UPS but after 7 years as a hourly employee I went into management. I was hired the day I got discharged from service. I retired with a fantastic pension at 55 with 36years service and free medical for life . Yes 55 . Ups is strong and hourly are some of the best hard worker in the industry , but also management is well trained. I ran ever operation we had from preloads, hubs package even airline and engineering. We were taught well.I was taught cut cut cut and watch every minutes . I feel comfortable that my investment is in good hands.so do the kids and grandkids.

[paulformal]

UPS lost 3 packages. Put in a claim for insured amount $695.00. They never paid it. The portal is horrible to claim. Customer service to call is next to impossible. In business since 1953. I buy my kids UPS stock every year. The drivers are fantastic. But issues like this are ruining the good UPS name.

[kemokelso]

@paulformal they want you to give up and not pursue the claim. Or at least, recognize that it will will cost you (how much effort are you willing to commit to recovering your due).

The very large shippers are able to hold "them" accountable with technology not available to the common man.

[craftbrewinfo]

“They (Ups)aren't as appealing as its largest rival, but they are still attractive enough to warrant consideration by investors.”

FedEx is horrible. Their service has deteriorated since 2019. Not to mention their business metrics.
I’d rather invest in the superior company I.e UPS ( says this 39 year veteran logostician)

[BuyCheap]

UPS is very expensive if we compare to FDX... FDX is safe now....

[Trevor42]

@Vince Gowda UPS is also the better company. Paying a slightly higher premium for a much better company is fair, in my opinion.

[ttims2]

@Vince Gowda FDX is a joke….I live in a very remote area, and they’ve already stopped most of their deliveries out here and pawned them off on the postal service, which is strange because we used to see the fed ex drivers several times per week.
It sure looks to me like they’re cutting back on drivers, and contractors

[AspiretoRetire]

@Trevor42 Completely correct. UPS has outperformed FedEx over almost every time period because, on nearly any measure that determines the multiple that investors will pay, UPS outperforms FedEx. Buying FedEx because it’s cheaper is foolish. It should be cheaper.

The looming recession worries me more than the competition. It’s hard to see UPS doing well in a recession, and I wouldn’t buy now. Long term, however, it’s a solid investment.