UPS (NYSE:UPS) is a well-managed company, but UPS stock has seen better days. Like everything else, the package delivery company’s future is cloudy thanks to the novel coronavirus pandemic. Even so, I remain optimistic about the company’s long-term prognosis, however rough the short-term is going to be.
Three years ago, Wall Street sent UPS shares into the “penalty box” after CEO David Abney committed the crime — at least in the eyes of short-term traders — of investing $20 billion in the company. Some investors haven’t forgiven Abney for his action. Shares of UPS dropped off hard during the latter part of 2018, as Wall Street worried about the massive spend.
Fast forward to the present, and evidence abounds that Abney’s bet on new airplanes and 10 million square feet of automation has paid off.
Investments Pay Off for UPS Stock
During the Atlanta-based company’s most recent earnings report, UPS reported its third straight gain in profit margins. Operating profit rose to 11.1% from 10.1% a year earlier. The adjusted cost to deliver a package dropped by 3.2% thanks to Abney’s investments.
UPS also picked up business from Amazon (NASDAQ:AMZN) after FedEx (NYSE:FDX) cut ties with the e-commerce site because of Amazon’s plans to start its own package delivery business. According to UPS, Amazon now accounts for about 12% of its overall revenue. Although UPS’s growing dependency on Amazon is a concern, it’s nothing that keeps me up at nights because it would be costly for Amazon to replace them.
The company is broadening its weekend delivery options and is expanding services to small- and medium-sized businesses. It also is adding more than 5 million square feet of new automated capacity.
I’m also a fan of UPS’s Flight Forward drone delivery service, which last year got clearance from the FAA to run a “drone airline.” A recent forecast estimates the drone package delivery market will hit $27.4 billion by 2030, indicating a compound annual growth rate of 44.7% since 2019.
Coronavirus Still Takes a Toll
Even so, the company will get hit hard by the economic slowdown along with every company that is dependent on consumer spending. Analysts at Credit Suisse recently slashed their 2020 earnings per share forecasts by 15 percent to $6.68 “in light of the broader macro implications that have emerged from the coronavirus pandemic.”
Shares of UPS are down nearly 16% so far during 2020 as investors sold off in the wake of disappointing earnings guidance and of course, again as Covid-19 ground the economy to a near-halt.
Valuation-wise, UPS stock isn’t anything special. The shares trade at a trailing price-earnings multiple of approximately 18, in line with the S&P 500’s valuation of 19.6. However, its dividend offers a yield of 4%, which isn’t anything to sneeze at in the current low-interest-rate environment.
The time to buy UPS stock is now, because it will become more expensive if — as many experts expect — the economy snaps back when the pandemic subsides.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams. As of this writing, he did not hold a position in any of the aforementioned securities.