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Why Experts Can’t Agree on UPS
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In 2023, labor put the screws to United Parcel Service (UPS). The company agreed to a 5-year contract with its union, sending labor costs through the roof. But maybe that was a good thing. Management bet that settling the issue sooner rather than later would benefit them in the long run. Plus, they were able to introduce a $1 billion cost savings plan while expanding into healthcare, both of which aimed to offset the labor cost hikes. This has put investors in a bind. According to our TrackStar data, experts aren’t sure whether UPS trades at a discount or is fairly valued, especially with the stock off almost 40% from its highs in 2022. After looking through the financials, we have the answer. UPS’ Business Every day, millions of brown trucks crisscross the globe. They belong to UPS, a logistics giant that moves far more than just packages. UPS operates a vast network spanning over 200 countries. Its services range from basic parcel delivery to complex supply chain management. With a fleet of over 500 aircraft and 100,000 vehicles, UPS handles an astounding 22 million packages daily, serving as a vital artery of global commerce. The company segments its business into the following areas:
UPS faces significant challenges in an evolving market. Labor issues loom large, with recent union negotiations resulting in substantial wage increases that pressure margins. Competition from Amazon’s growing delivery network threatens UPS’s core business. However, opportunities abound. UPS is expanding aggressively into healthcare logistics, a $150 billion addressable market. Strategic acquisitions have built a $10 billion healthcare business, positioning UPS for growth in this lucrative sector. UPS is also working to aggressively expand its market share through its On Demand Network, new next-day flight routes with Asia, and enhanced DAP with Fastlane to optimize rates.
Source: UPS Q1 2024 Investor Presentation Financials
Source: Stock Analysis UPS’ revenue drop in 2023 was the first YoY drop since 2009. After a post-pandemic purchasing surge, demand for goods pulled back, economic activity in Europe dropped, and competitive pressure increased, leading to a 10% YoY drop. Gross margins compressed as the company faced pricing pressure and new labor contracts, which they inked a 5-year deal on last year. However, management expects the labor cost growth rate to drop in the second half as they lap the first full year of the contract. The company’s “Fit to Serve” program also aims to save $1 billion in costs. Management also reaffirmed its 3-year adjusted operating margin of +13%, about 1% higher than Q1 in 2023 and 2024, driven largely by the new healthcare business. Currently, UPS holds $24.4 billion in total debt with $4.5 billion in cash. While this is a little lopsided, the company continues to generate $3.2 billion in free cash flow. However, this puts it slightly upside down against its $5.4 billion annual dividend. Management also suspended its $1.5 billion share buyback program through the end of the year. Valuation
Source: Seeking Alpha UPS and its main competitor, FedEx (FDX), trade at similar P/E and price-to-cash multiples. Other integrated transport companies like Expeditors International (EXPD) and J.B. Hunt (JBHT) trade at higher P/E multiples, though only EXPD trades at a higher price-to-cash multiple. All-in-all, UPS is valued similarly to other companies in the industry. Growth
Source: Seeking Alpha Some carriers like EXPD and Hub Group (HUBG) saw revenues plunge YoY. With the exception of FedEx, all carriers expect to see sales drop in 2024. If we look back over a three and five year period, none of the group really stands out as a top performer. Profitability
Source: Seeking Alpha We do see some separation between the companies on gross margins. But by the time we get to EBITDA and net income margin, they all appear the same, with Hub Group being the only real exception. Interestingly, UPS holds the highest return on equity, though is only second in return on assets and capital.
Our Opinion 6/10 UPS is about as fairly priced a stock as we’ve seen. Shares are down significantly from their highs in 2022 as margins compressed and revenue shrank. Yet, the company expects things to improve from here. Our only issue is that UPS is relying on its new healthcare segment to offset its higher labor costs, leaving it with no real growth mechanism. However, the same can be said for every company in this sector. So, while it’s the best of the bunch, we’re cautious on the name. |
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