United Parcel Service: Delivering Steady Earnings (NYSE:UPS)

In its last quarterly report, United Parcel Service, Inc. (NYSE:UPS) reported revenue increase of 5.7% from a year ago and earnings grew 6.6% to $3.25 per share. In the first six months of this year, the company’s free cash flow held steady at $6.9 billion. These numbers are pacing lower than they did in 2021 as a result of the Covid-19-driven bump most companies saw last year coming out of the pandemic.

E-commerce

In spite of the short term downtrend, UPS is poised to continue to benefit from the long term growth in e-commerce. Over the long term, the e-commerce market has plenty of room to grow and could increase from $3.3 trillion today to $5.4 trillion in 2026. Globally, the penetration of e-commerce with small and mid-size businesses is only the beginning with retail e-commerce making up 16% of total retail sales growing to 22% in 2023.

Having recently lowered the volume packages that UPS delivers for Amazon in the past year, the company is focusing more on serving the small and mid-size businesses segment that is driven by the growth in e-commerce.

The Last Mile

Categorized as a last mile company, where the courier brings the customer their order, UPS in the last two years has been investing to increase its capabilities through its acquisitions of Roadie and Delivery Solutions. Roadie, a crowdsourced logistics company, pioneered the same-day, urgent (on-the-way) delivery of any item, any size to more than 90% of U.S. households. The purchase of Roadie puts UPS in the space of delivery of perishable items, including groceries, without having to redesign its packaging operations. This acquisition puts UPS in the same delivery market as DoorDash (DASH) and Instacart.

In a statement regarding the acquisition, the company said:

“UPS customers, including large enterprises, are increasingly looking for local same-day delivery solutions for goods of all types, not traditional packages. Roadie often provides service for shipments not compatible with the UPS network because of their size and perishable nature, and often because they are in shopping bags without the packaging required to move through the UPS system.”

Another acquisition, Delivery Solutions, a software-as-a-service delivery orchestration platform, helps merchants offer their customers flexibility through its omnichannel capabilities. Delivery Solutions’ technology connects shippers and retailers to an ecosystem of same-day delivery providers. By offering omnichannel solutions, in addition to same-day delivery, UPS customers don’t have to go elsewhere for these needs.

It’s clear that UPS sees itself long term more than just a package delivery company, and is incorporating other business models and delivery capabilities to drive growth over the next several years. Unlike its closest competitor, FedEx Corporation (NYSE:FDX), whose preference is to build and test internally new delivery options, UPS is not afraid to go head first and buy potential competitors and partners.

Analysis

Hold Rating: I have a Hold rating for UPS’s stock with a five-year target price of $294 per share.

In my analysis, I estimate that the company will grow its top line revenue by 10% over the next five years as it continues to benefit from the long term growth in e-commerce. However, I have the company’s net margin contracting a bit from 13% to 11% due to additional investments in future growth initiatives and acquisitions.

With UPS’s stock currently trading at 13 times earnings, it is not trading at a discount relative to its growth prospects. As a result, I would rate the stock a Buy if the stock were to trade at $155 per share presuming the company’s fundamentals and business prospects remain the same or improves.

With the company still having $3 billion remaining authorized under its share repurchase program, I am estimating a decrease in outstanding shares by approximately 15 million shares based on current prices, which should provide a boost to earnings by an additional 2%.

Below is a table contrasting the company’s current metrics and stock price to the 5-year estimate:

United Parcel Service	Current* (as of 8/28/22)	5-Year Estimate
Revenue (in millions)	$97,290	$142,442
Net Margin (%)	13.25%	11%
Net Income (in millions)	$12,890	$15,669
# Outstanding Shares	878,000,000	853,000,000
Net Income per Share	$14.68 per share	$18.37 per share
Price/Earnings (PE) Ratio	13.55	16
Stock Price	$198.93	$294

Click to enlarge

Source of company metrics: Morningstar, UPS

*Current metrics based on fiscal year end 2021

To better understand how to read the table above, read my previous article Meta: Attractive Valuation.

With the company projected to grow in the low double digits, UPS is positioned well to provide shareholders with steady, growing earnings and returns over the next five years.