United Parcel Service (UPS +2.39%), one of the world's largest shipping couriers, is often considered a stable blue chip stock for conservative investors. It went public in 1999, in the biggest initial public offering of the 20th century, joined the S&P 500 in 2002, and has raised its dividends annually for 15 consecutive years.
But over the past three years, the stock lost more than a third of its value as it struggled with stiff competition from FedEx (FDX +3.79%), protracted labor negotiations, and macro headwinds that curbed shipping volumes across multiple industries. Let's see if UPS can recover from that slump and head higher again over the next three years.
Image source: UPS.
What happened over the past three years?
In 2021, UPS' average daily package volume, average revenue per piece, and operating margin all rose as the pandemic generated strong tailwinds for the e-commerce sector and other online shipping. In 2022, the company's average volume declined as those tailwinds dissipated, but it partly offset that pressure by raising its rates, which boosted its average revenue per piece and total revenue for the full year.
|
Metric |
2021 |
2022 |
2023 |
|---|---|---|---|
|
Average daily package volume |
25.25 million |
24.29 million |
22.29 million |
|
Average revenue per piece |
$12.32 |
$13.38 |
$13.62 |
|
Total revenue |
$97.29 billion |
$100.34 billion |
$90.96 billion |
|
Adjusted operating margin |
13.5% |
13.8% |
10.9% |
|
Diluted earnings per share |
$14.68 |
$13.20 |
$7.80 |
Data source: United Parcel Service.
That pressure persisted in 2023, but its 2% growth in average revenue per piece couldn't offset its 8% decline in daily package volumes for the full year. That slowdown was exacerbated by inflation, other macro headwinds, and fears of a strike as it negotiated a new contract with the Teamsters Union, which represented about 330,000 UPS workers.
As a result, annual revenue declined for the first time since the Great Recession in 2009.
NYSE: UPS
Key Data Points
UPS signed a new five-year contract with the Teamsters last summer, but its core business still struggled. In the first six months of 2024, its average daily package volume fell 2% year over year, average revenue per piece dipped 1%, total revenue fell 3%, and operating margin declined 360 basis points to 8.2%.
That slowdown is disappointing, but UPS expects its business to warm up again in the second half of the year, as the macro pressure eases and it serves more healthcare and small to medium-size businesses. It's also laying off about 12,000 employees this year, investing in new technologies, and automating more tasks to cut costs.
Where will UPS be in three years?
For the full year, management expects revenue to grow 2% to $93 billion, but analysts forecast the higher initial costs from its new Teamsters contract will reduce its earnings per share by nearly 8%. That outlook seems messy, but UPS expects its growth to stabilize and accelerate again as the market warms up and it laps those near-term challenges.
In March, the company set a long-term goal of generating $108 billion to $114 billion in revenue by 2026. That would represent a compound annual growth rate of 6% to 8% from 2023. It also expects its adjusted operating margin to rise from 10.9% in 2023 to "above 13%" by 2026 as its annual free cash flow grows from $5.3 billion to a range of $17 billion to $18 billion.
We should take those estimates with a grain of salt, but they imply UPS reached the nadir of its cyclical trough over the past year. Its stock still seems like a bargain at 14 times forward earnings, and its forward dividend yield of 5% might attract a lot more attention from income investors as interest rates start to decline. FedEx also has a forward price-to-earnings ratio of 14, but it pays a much lower forward yield of 1.8%.
UPS stock won't blast off anytime soon. But it has a resilient business model, looks undervalued, and pays a hefty dividend. Therefore, I expect it to bottom out at these prices and gradually head higher over the next three years.
