The Motley Fool was founded in 1993 by brothers Tom and David Gardner. Through our website, podcasts, books, newspaper columns, radio programs and advanced investment services, we help millions of people achieve financial freedom.
United Parcel Service (NYSE: UPS) had another outstanding quarter, with its international profits hitting a record high, with double-digit revenue and earnings growth. However, due to concerns about the decline in US profitability and expectations of lower profit margins in the fourth quarter, the stock still fell 8.8% on Wednesday.
UPS’s revenue call is full of impressive results and forecasts for future revenue growth. Let’s look at the content behind these numbers to determine whether Wall Street has sold UPS in error and what will drive the stock price up in the future.
Similar to the second quarter, e-commerce and small and medium business (SMB) residential demand surged, resulting in UPS record revenue. Compared with the third quarter of 2019, revenue increased by 15.9%, adjusted operating profit increased by 9.9%, and adjusted earnings per share increased by 10.1%. UPS’s weekend land transportation volume increased by 161%.
Throughout the pandemic, UPS’s headline news was a surge in its residential deliveries as people avoided shopping in person and turned to online sellers. UPS now predicts that e-commerce sales will account for more than 20% of US retail sales this year. UPS CEO Carol Tome said: “Even after the pandemic, we don’t think the penetration rate of e-commerce retail will decline, but not just retail. Customers in all areas of our business are reshaping the way they do business.” . Tome’s view that e-commerce trends will continue is big news for the company. This shows that management believes that certain actions of the pandemic are not only temporary obstacles to business.
One of the most subtle gains in UPS’s third-quarter earnings was the increase in the number of SMBs. On the company’s fastest route ever, SMB sales increased by 25.7%, which helped offset the decline in commercial deliveries by large companies. Overall, SMB volume increased by 18.7%, the highest growth rate in 16 years.
Management attributes a large part of SMB’s growth to its Digital Access Program (DAP). DAP allows smaller companies to create UPS accounts and share the many benefits enjoyed by larger shippers. UPS added 150,000 new DAP accounts in the third quarter and 120,000 new accounts in the second quarter.
So far, during the pandemic, UPS has proven that higher residential sales and participation by small and medium enterprises can offset the decline in commercial volume.
Another secret detail of the company’s earnings conference call is the positioning of its healthcare business. The healthcare and automotive industries were the only business-to-business (B2B) market segments this quarter-although the growth was not enough to offset the decline in the industrial sector.
The transportation giant has gradually improved its important medical transportation service UPS Premier. The broader product lines of UPS Premier and UPS Healthcare cover all market segments of UPS.
Relying on the needs of the healthcare industry is a natural choice for UPS, because UPS has expanded ground and air services to accommodate high-volume residential and SMB deliveries. The company also made it clear that it is ready to handle the logistical aspects of the COVID-19 vaccine distribution. CEO Tome made the following comments on UPS Healthcare and the pandemic:
[The medical team is supporting clinical trials of the COVID-19 vaccine at all stages. Early participation provided us with valuable data and insights to design commercial distribution plans and manage the logistics of these complex products. When the COVID-19 vaccine came out, we had a great opportunity and, frankly, shouldered a great responsibility to serve the world. At that time, our global network, cold chain solutions and our employees will be ready.
As with other pandemic-related tailwinds, it is easy to attribute UPS’s recent success to temporary factors that may gradually disappear as the pandemic ends. However, UPS management believes that expanding its transportation network may bring long-term benefits, most notably the continued rise of e-commerce, the integration of SMB into its customer base and the time-sensitive medical business, which will continue Meet the needs of the medical industry in the next few years.
At the same time, it is worth reiterating that UPS’s third-quarter results were impressive when many other industrial stocks were in trouble. UPS recently surged to a new 52-week high, but has since fallen along with other markets. Considering the stock’s sell-off, long-term potential and a dividend yield of 2.6%, UPS now seems to be a good choice.