UPS stock should continue to grace your portfolio: here’s why

Great courier service UPS benefits from the growth of e-commerce and high liquidity. A shareholder-friendly approach is also good for the company. However, the weak demand scenario hurts UPS’s results.

Factors favoring UPS

United Parcel Service’s impressive e-commerce growth, fueled by the convenience of online shopping, is supporting the growth of shipping companies like UPS. The 2022 agreement with ESW is part of the growing trend of cross-border e-commerce among Millennials and Generation Z, expanding the company’s e-commerce capabilities and positioning it for potential revenue growth by meeting evolving consumer demands.

Shareholder-friendly measures include a 15th consecutive annual dividend increase and authorization of $5 billion in share repurchases. In 2024, UPS management increased its quarterly cash dividend to $1.63 per share. For 2024, United Parcel Service expects to pay a total dividend of $5.4 billion.

The company expects weak transportation demand to improve in the second half of 2024, forecasting consolidated revenue growth of 4-8% and adjusted operating profit of 20-30% year-over-year. Over the next three years, UPS plans to drive growth in premium markets and increase productivity. By 2026, United Parcel Service projects consolidated revenues in the range of $108 billion to $114 billion and adjusted operating margins of more than 13%.

At the end of the first quarter of 2024, the UPS current ratio (liquidity measure) was set at 1.10. A current ratio greater than 1 is always desirable because it indicates that the company has enough cash to meet its short-term liabilities. United Parcel Service generated $3.31 billion in net cash from operations. Capital expenditures amounted to $1.03 billion. Free cash flow was $2.28 billion.

Key risks

UPS is struggling with an economic slowdown resulting from geopolitical uncertainty and high inflation, which is leading to a decline in shipment volumes. As a result, average daily volumes (consolidated) decreased by 7.4% year-over-year in the fourth quarter of 2023 and by 3.2% in the first quarter of 2024.

Consolidated revenues of $21.7 billion represent a decline of 5.3% compared to the first quarter of 2023. Consolidated operating income was $1.6 billion, a decline of 31.5% compared to the first quarter of 2023. UPS expects 2024 revenue to be between $92 billion and $94.5 billion.

The agreement with the Teamsters union will significantly increase labor costs. United Parcel Service projects that payroll and benefits costs will increase at an average annual rate of 3.3% over the next five years, with a high percentage increasing in the first year. The contract, which expires in August 2028, will increase costs in the second half of this year by approximately $500 million. UPS expects payroll and benefits expenses to increase 4.8% year-over-year in 2024.

UPS shares are down 20.1% over the past year compared with the overall industry’s decline of 14.1% over the same period.

Image Source: Zacks Investment Research

Zacks Rank

United Parcel Service is currently sporting a Zacks Rank #3 (Hold).

Stocks to consider

There are better-rated stocks for investors to consider in the Zacks Transportation sector SkyWest SKYW i Kirby Company KEX, each currently sporting a Zacks Rank #1 (Strong Buy). You can see complete list of today’s Zacks #1 ranked stocks here.

SkyWest expects an earnings growth rate of 787% this year.

SKYW has an impressive history of surprise profits. Its earnings have surpassed the Zacks Consensus Estimate in each of the four consecutive quarters, delivering an average surprise of 128%. SkyWest shares are up 101.4% in the past year.

KEX expects an earnings growth rate of 42.5% this year.

The company has an encouraging track record of earnings surprises, surpassing the Zacks Consensus Estimate in each of the last four quarters. The average strike is 10.3%. Kirby shares are up 61.4% in the past year.

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