2023-04-06 11:42:17 ET
Summary
- UPS won't likely be able to continue to raise fees and surcharges at the current rate, the move to online retail will also likely slow as Covid fears ease.
- Amazon should launch larger scale third-party pick-ups and deliveries soon. DoorDash and other delivery companies will also likely continue to hurt the core business.
- The stock looks overvalued since profit levels are likely peaking.
Warren Buffett once famously said that there weren't any horse and buggie companies who successfully made the transition to automobiles when the transportation industry changed dramatically in the early 20th century. The best companies continue to evolve, but corporations often find transforming the business model to be difficult.
An industry that is going through a number of significant changes right now is the shipping and delivery business. United Parcel Service, Inc. (UPS), one of the largest shippers in the US worldwide, is at the center of much of this evolution. UPS is the largest shipper in the United States with nearly 25% market share, and this company also operates globally. The leading shipper gets nearly 70% of their revenues from the US.
UPS has performed well over the last decade, but the company has also consistently underperformed the S&P 500 ( SPY ) and other benchmarks.
UPS is up 126% over the last ten years, while the S&P 500 has risen 156.43% during the same time period.
Still, UPS has outperformed over the last three years primarily because of the move to online retail and management's ability to raise prices to pass on fuel and other costs to their customers.
UPS's stock is up 99% since 2020, the company has outperformed since Covid hit in late 2019 and prices began to rise significantly in early 2021.
Sill, UPS's recent earnings reports show several warning signs, and the company also faces significant longer-term threats from companies such as Amazon as well. Today, UPS is a sell. Management is relying on unsustainable price increases to drive revenue and earnings growth, the recent rapid move to online retail accelerated the company's earnings growth at a rate that should slow significantly moving forward, and the company still has no major competitive advantages against growing companies such as Amazon ( AMZN ). The stock also trades at a growth multiple even though analysts are forecasting earnings to increase at a low-single digit rate over the next five years.
UPS benefitted significantly from a rapid move to online retail because of the pandemic, and the company has also been able to consistently raise fees and surcharges to offset rising costs as well. UPS recently reported fourth quarter earnings of 11.03 billion in 2022, which was a record. The company earned $10.7 billion in 2021, which was also a record at the time. UPS's earnings were $6.5 billion prior to the pandemic in 2019. The company's earnings have risen nearly 20% a year since the pandemic, and revenues have increased around 11% since 2020.
UPS's revenue growth slowed dramatically last year to just 3%, and the company's adjusted operating margins were also down to 12.8% from 13.5%. The company says they expect revenues to be lower next year, within the range of $97 billion to $99.4 billion, and margins to come in between 12.8% and 13.6%. UPS grew revenues at 3.1% last year primarily because the company was able to increase revenues per shipped item by 7.2%, showing that price increases were the primary driver of the company's earnings growth in 2022.
UPS's margins are also at historic highs right now, and the company won't likely continue to raise prices and impose surcharges at the current rates we've seen over the last several years with competition getting stronger. UPS will likely face a difficult negotiation with the Teamsters union over a new labor agreement later this year that should result in wages rising significantly.
A chart showing UPS's margins (macrotrends.net)
UPS also faces significant competition from Amazon, as well as on a smaller scale from companies such as Door Dash and Uber. While food delivery companies aren't going to deliver packages nationwide, these companies are increasingly willing to pick-up and deliver packages for low costs, and this has the potential to hurt part of UPS's core business over the long-term.
The biggest threat to UPS right now is from Amazon though. Amazon already delivered more packages than Fed Ex in 2021, and this leading online retailer has spent several years building out their logistics to ship packages for third parties as well. UPS shipped nearly 5.5 billion packages in 2022, analysts are expecting Amazon is expected to ship nearly 10.6 billion packages this year. Amazon has slowly been decreasing the company's reliance on UPS and building out their own logistics networks over the last three years. UPS's revenue tied to Amazon has fallen from 13.3% in 2020 to 11.3% in 2022. Amazon has nearly 22% of the US shipping market, compared to UPS's 24%, but Amazon is getting just 12% of the industries overall revenue. Amazon should continue to take market share in this industry, and UPS also will not be able to depend as much on the leading online retailer for revenues moving forward. Amazon also key advantages over UPS. Amazon has far more resources than UPS in addition to having a workforce that isn't unionized. Amazon's management team has also been predictably more innovative with delivery options, offering same day delivery much faster than UPS was able to.
This is why UPS's stock looks overvalued at current levels. The company currently trades at 16.69x projected forward earnings, but analysts are only forecasting sales growth of 4.6% in 2024, and 3.99% over the next five years. Management has also repeatedly warned about a slowdown in the company's business and a likely coming recession, which should be a warning sign for investors.
UPS is coming off two consecutive years of record earnings, but the company faces a number of significant short-term and long-term headwinds moving forward. Management won't likely be able to again rely on price increases and surcharges to offset slower volume growth this year, and Amazon continues to build out the company's own logistics networks as well. There is obviously expected to be a continual shift to online retail, the speed of the change should slow from the rate seen in previous years now that Covid fears are easing. While UPS has been one of the best performing stocks in the market over the last three years, this company's earnings growth is likely unsustainable.
For further details see:
UPS: Peaking Profits And The Threat Of Amazon Make This Company A Sell