Instead, the novel coronavirus pandemic, and resulting rise in online shopping, is stretching delivery services to their limits. Experts are calling the coming Christmas season “Shipageddon.” Both UPS and rival FedEx (NYSE:FDX) are warning shippers most of their holiday capacity is already reserved.
This has done wonders for UPS stock, which has broken out of a five-year trading range. Shares are trading at $174. They’re up 47% for the year.
‘Laissez Les Bons Temps Rouler’
If you remember Mardi Gras, you know this means “let the good times roll.” Right now, the entire shipping sector is in vogue.
UPS stock is due to report earnings Oct. 28. Analysts expect net income of $1.80 per share on revenue of nearly $20 billion. Those estimates could be low. UPS is already adding surcharges on deliveries for the holiday.
Credit goes to Amazon, which chose to focus on grabbing market share during the pandemic, instead of investing in delivery capacity. Analysts have been behind the curve on the news, giving UPS only a moderate buy rating, and a one-year price target below its current price.
Amazon’s move played right into UPS’ hands. The company increased capital spending during 2019, to almost $6.4 billion. It was able to make money on that spending during the pandemic.
So far this year FDX has been the hotter than UPS, up 87% in 2020. Last year’s feud between the company and Amazon seems forgotten by analysts.
But that’s not how things look on the ground.
While this may be anecdotal evidence, two of my street’s recent shipments from Amazon came in rented Penske (NYSE:PAG) trucks and one in a passenger van. Most came in standard Amazon trucks, two came from UPS. None came from FedEx. None came from the U.S. Postal Service either, a notable change from past years.
The Bear Case
The bear case on UPS is economic.
Analyst Wolf Richter said consumers expecting stimulus checks and rent forbearance could cut back quickly if they don’t get money soon. Ocean containers were sold out for October sailing, and shippers are paying higher rates while fuel costs remain low.
But much of this is catch-up traffic. Freight volumes plunged at the start of the year and remained below 2018 levels in September. While current spending on durable goods is at a $1.7 trillion rate, it’s normally $1.5 trillion, and fell to $1.2 trillion early in the year.
Investing on the assumption that current trends will continue may be a sucker’s bet, say the bears. The profit fountain this fall could be cut off in 2021.
The Bottom Line
UPS investors face two big questions going into next year. How much of the online boom will remain intact after the pandemic and how much capacity will Amazon’s own capital spending take from the market?
Cowen & Co. expects the coronavirus vaccine to take up any capacity slack. A longer vaccine rollout will boost shippers like UPS.
At its current price, UPS is fully valued. A price-earnings ratio of 34 is high for a slow growth company, and the dividend now yields just 2.3%. But the rise of Amazon, the rise of online shopping generally, and the fall of the Postal Service all provide tailwinds for the stock.
There are two reasons for a high P/E. Either investors are overpaying, or they’re anticipating higher earnings. UPS will have higher earnings this year, and that momentum could continue.
At the time of publication, Dana Blankenhorn had a long position in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.