UPS with Nobias technology: Will UPS rally during the holiday season?
The United Parcel Service (UPS) has had a solid 2021 thus far. UPS shares are up 22.68% year-to-date, which is only slightly below the 23.0% year-to-date performance posted by the S&P 500. However, UPS’s dividend yield is slightly higher than the S&P 500’s (UPS shares yield 1.97% currently whereas the SPDR S&P 500 ETF (SPY) currently yields 1.24%) so with that factored in, the year-to-date comparisons between United Parcel Services and the broader market’s total returns are essentially in-line with one another.
This stock has been in the news this week because its rival, FedEx (FDX) posted strong earnings which sent its shares up approximately 7.5% on Friday, December 17th. UPS shares lagged, only rising 0.66%, causing certain bulls to wonder if UPS will follow suit and rally during the holiday shipping season as well.
UPS won’t report its next quarterly earnings until February 1st, 2022, so investors won’t have the chance to see just how much the holiday season’s shipping volumes boost UPS’s sales and earnings for several months; however, in the meantime, we wanted to take a look at what the credible authors/analysts that the Nobias algorithm tracks have been saying about UPS shares to see if this logistics company might be next in line to experience a significant share price jump.
Roughly a month ago, on November 16th, Nobias 5-star rated author, Daniel Foelber, posted an article at The Motley Fool titled, “5 Reasons UPS Deserves to Be at an All-Time High”. He began that piece saying, “After a record 2020, United Parcel Service (NYSE:UPS) is showing no signs of slowing down. Shares of UPS have nearly doubled over the last three years and are up 23% year to date. “ He continued, writing, “In 2020, UPS was one of the few industrial companies to post record top- and bottom-line results. This year, it is one of the few industrial companies with a handle on its supply chain, as well as its labor force, despite rising costs.”
Foelber cited the company’s double digit operating margin during 2021 thus far, and the 13% operating margin guidance for the third quarter, as proof that this management team is top notch. He wrote, “Retaining a high operating margin shows that the company is successfully converting revenue to profit and managing costs in a way that limits the impact on its bottom line.”
UPS Dec 2021
With regard to the stock’s strong profit-related performance, Foelber said, “In fact, UPS delivered record third-quarter 2021 revenue of $23.2 billion, up 9.2% over its record prior-year quarter. It also generated diluted earnings per share (EPS) of $2.65 for the third quarter, 18.9% above the year-ago period. The company is generating more free cash flow (FCF) than ever before, which is allowing it to grow its dividend, pay down debt, reinvest in the business, and buy back stock.” He continued his bullish article, highlighting the company’s longer-term growth potential.
Foelber stated, “Arguably more important than how UPS is doing today is how it's going to perform one, three, five, or even 10 years into the future. What makes UPS such a good business is that all three of its segments (U.S. domestic, international, and freight) continue to grow while operating at high profit margins. Driving that growth is an increasingly intertwined global economy, but also trends such as e-commerce, healthcare, and automotive shipping services.”
And finally, Foelber highlighted the company’s strong dividend growth. In the introduction we noted that UPS’s dividend is significantly higher than the S&P 500’s and Foelber talks about why, saying, “UPS pays $1.02 per share per quarter, double what it paid in 2010 and 5 times what it paid 20 years ago.” He concluded his piece saying, “In sum, UPS deserves to be at an all-time high because its business performed well during the pandemic, continues to perform well despite economic challenges, and is positioned to perform well for years to come.”
Lee Samaha, a Nobias 5-star rated author published a bullish report on UPS at The Motley Fool more recently, on December 16th. Samaha said, “It's no secret that e-commerce volumes were booming even before the pandemic created a whole new generation of online shoppers. That's excellent news for the package delivery companies. However, it doesn't come without challenges.”
Samaha notes that inefficiencies in the packaging and shipping businesses make it difficult for companies to “generate volume growth and maintain or grow profit margin”; however, it appears that UPS is doing just this. Samaha said that the solution to the issues in the logistics space is as simple as being “more selective on the type of deliveries and customers you want because there's plenty of volume growth to go around.” This is exactly the strategy that UPS has adopted under CEO Carol Tomé.
Samaha touches upon the “better, not bigger” framework that Tomé has laid out in front of her company, writing, “The transformation strategy focuses on revenue generation from e-commerce deliveries, healthcare, and high-growth international markets -- particularly the small and medium-sized business (SMB) market. Meanwhile, "bigger, not better" implies utilizing existing assets better and being more selective on deliveries.”
Samaha highlighted the same bullish margins data as Foelber, saying, “For example, UPS management forecasts its key U.S. domestic package margin will be 10.5% in 2021, a figure that's already at the bottom end of its targeted range (10.5%-12%) for 2023 fueled by 10.9% volume growth in the SMB market in the third quarter.”
As UPS’s shipment volumes increase, Samaha says, “investors can expect even more revenue growth to drop into earnings”. Therefore, Samaha maintains a bullish stance when it comes to UPS over the longer-term. Shares of United Parcel Service’s stock trade with a relatively high valuation premium over rival FedEx’s. UPS’s blended price-to-earnings ratio is currently 18.01x. FedEx, on the other hand, trades with a much lower 12.87x ratio.
On a forward basis, FDX shares trade with a 12.2x forward P/E ratio (relative to consensus estimates for fiscal 2022 earnings-per-share expectations) while EPS trades with a 17.0x forward premium. This could imply that FedEx’s recent rally was, in essence, that stock playing catch up to its larger peer (UPS’s market cap is $180.7 billion compared to FDX’s $63.2 billion market cap figure).
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
However, being that UPS’s margins are higher than FedEx’s and historically, UPS shares have produced more stable and reliable earnings growth (since 2009, UPS has produced positive earnings-per-share growth every single year, while FDX has shown more negative volatility, such as during 2020 when it’s earnings-per-share fell by 39%) might imply that the relatively higher valuation premium applied to UPS shares is justified.
The community of credible authors that the Nobias algorithm tracks sure seem to think so. Right now, 95% of these authors express a “Bullish” sentiment on UPS shares. The average price target amongst the blue chip (Nobias 4 and 5-star rated) Wall Street analysts that we track for UPS is currently $242.75. Compared to the stock’s current share price of $206.59, this average price target represents upside potential of approximately 17.5%.
Therefore, it appears that the credible authors that we track do believe that UPS is likely to follow in FedEx’s recent footprints. UPS shares have traded sideways since late June and if the bullish sentiment shown by the analysts that we follow is accurate, this period of consolidation should be forming the base for UPS’s next upside move.
Only time will tell, but FedEx’s recent results point towards continued growth in the logistics industry and as both Foelber and Samaha point out, this company is second to none in terms of the record breaking profits that it’s generating on soaring shipping volumes.
Disclosure: Nicholas Ward has no position in any stock mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.