2023-10-10 23:01:28 ET
Summary
- UPS has faced a tough year with lowered guidance and negative news, leading to disappointing stock performance.
- The logistics industry as a whole is experiencing a slowdown, with UPS projecting lower revenue for 2023.
- UPS is pursuing higher-margin businesses like healthcare logistics, which could be lucrative in the long term.
- UPS is an extremely high-quality business trading at a depressed multiple and should be considered by investors with a long-term horizon.
Introduction
2023 has been a tough year for United Parcel Service ( UPS ). In April, the company lowered full-year guidance, disappointing investors. In August the market winced as just about everyone considered a career change for the staggering $170k per year that UPS drivers were reportedly due to be compensated. In the same month, UPS significantly lowered full-year guidance for a second time. Now in October, reports have emerged that UPS customers are successfully negotiating massive discounts that are bound to hurt the company's top and bottom line.
UPS appears to have launched a defense, proactively trying to generate positive headlines surrounding their business. At the end of September, the company proudly announced in a formal press release it would be hiring 100,000 seasonal workers for the 2023 holiday season - a rather mundane business detail the company did not feel the need to boast about in prior years. The formal press release projected an air of insecurity from management regarding business performance and public perception.
Accompanying this year's negative news has been disappointing stock performance. UPS is down 10% YTD meanwhile main competitor FedEx ( FDX ) - which is experiencing all of the same underlying pressures - is up 47% YTD.
Does this underperformance from UPS present a buying opportunity, or should investors look elsewhere for returns?
A Slow Year
There is no debate that 2023 has been a slower year for the logistics industry, and that does not appear likely to change in the immediate future. UPS is currently projecting 2023 revenue of $93 billion, down from their initial $97 billion estimate at the beginning of the year. In 2022 UPS reported revenues exceeding $100 billion for the first time, and 2023 will be the first year in over a decade that UPS has not reported positive year-on-year revenue growth. In fairness, this is an industry-wide problem, not a UPS-specific issue.
ShipMatrix, a logistics industry research and consulting firm, reported to Reuters that US carriers will deliver an estimated 82 million parcels per day during the fast-approaching peak holiday season. Last year the industry delivered 90 million parcels a day during this period. ShipMatrix further reported that UPS, FedEx, USPS, and Amazon have the combined capacity to deliver more than 110 million parcels per day meanwhile customers are only sending about 70 million daily packages for delivery - the greatest imbalance in three decades.
Despite the supply-demand imbalance and reports of customers winning massive discounts from the shipping companies, FedEx and UPS have both stated they are planning to UPS)%20said%20late,5.9%25%20increase%20late%20last%20month." target="_blank"> raise their general prices by 5.9% next year . The two companies operate a near-duopoly in the US market and between 2015 and 2021, they were both able to simultaneously increase their shipping rates by 4.9% annually . And of course, as investors, we should be conscious that one slow year is not what defines a business, and often temporary downturns can offer attractive entry points for those patients enough to endure.
Zooming out, UPS demonstrates a rather staggering 10-year performance showing positive revenue growth every single year for the decade following 2013, growing revenues from $55 billion to over $100 billion - a compounded annual growth rate of over 6%.
These numbers are directly attributable to the growth of the e-commerce industry which shows absolutely no signs of slowing with forecasted growth of 11% per year through 2027 . Even with new competitors emerging, namely Amazon Shipping, the rising tide of e-commerce will surely lift all boats even if the industry is in a momentary lull.
Labor Costs
The headline figure that was thrown around in August - $170k total compensation for a UPS driver - sounds worrisome from a shareholder perspective, at least initially, and had markets at large fretting about out-of-control labor costs. But consider that overall labor costs for UPS will rise only about 3.3% per year on average over the life of the relevant five-year union contract which is where all the media noise originated. This is above the Fed's 2% inflation target, but far less than the previously mentioned 5.9% that UPS plans to raise prices by in 2024. Consider also that this $170k figure that made headlines only applies to full-time drivers, who will be offered $49 per hour, but part-time workers will earn a meaningful, but significantly lower, $21 per hour. The simple fact is that UPS will take advantage of whatever wiggle room that the new union contract allows them, and shifting their labor force composition to lean more heavily on part-time workers is an obvious strategy, albeit a potentially unsavory one to some.
Looking to the Future
Amid all the negative news and relentless stock selling, UPS executives have continued to state they are pursuing higher-margin businesses such as healthcare logistics which came into focus in 2020 when UPS and FedEx began transporting COVID-19 vaccines. UPS is in the process of acquiring its second healthcare logistics operator MNX Global Logistics which follows the completion of the Bomi Group acquisition in late 2022. These are long-term strategic moves from UPS that could prove incredibly lucrative. Market Research Future, an industry research group, projects the healthcare logistics sector will more than double in value over the next 10 years , reaching about $179 billion in sales by 2032. To put that in perspective, interpreting UPS's latest 10-Q filing , healthcare (which is reported as a component of the Supply Chain Solutions revenue subcategory) currently accounts for a projected $2 billion of annual revenues at most .
Current Valuation
Despite UPS's incredibly poor stock performance relative to FedEx in 2023, UPS still appears to be the more expensive business in comparison. As shown below, FedEx trades at a lower multiple on nearly all metrics relative to UPS.
This might give pause for concern, but UPS is a business of superior quality which is not immediately evident when looking at superficial value metrics. UPS has consistently reported a significantly higher ROIC over the past 5 years in comparison to FedEx. UPS's 5-year average ROIC is a staggering 25.9%, almost triple FedEx's 8.8%.
When viewed holistically, a forward PE ratio of 15 for a business boasting a 5-year ROIC of 26% looks like an incredible bargain.
Final Opinion
It has been a slow year for logistics, but the industry still has fundamental growth tailwinds that will benefit major players for years to come. Additionally, UPS management does not appear content to rest on their laurels, focused on achieving long-term success with their strategic investments in the healthcare logistics sector. UPS is an extremely high-quality business with proven pricing power, operating a near-duopoly in its primary market, and trading at a below-market multiple. The negative headlines surrounding labor costs are overblown and not a UPS-specific issue, but regardless, UPS stock has experienced a disproportionate amount of selling pressure.
Investors who are willing to buy a high-quality business when it has temporarily fallen out of market favor such as UPS will be rewarded in time.
For further details see:
UPS: Stuck In Negative News Cycle; Is It All Bad?