UPS is Attractive Even in This Environment: Here’s My Plan

Quickly… she moves up the ranks of Sarge’s favorite CEOs. I’m referring to Carol Tome (United Parcel Services) CEO, who was previously The Home Depot (HD), Treasurer and Chief Financial Officer. Tome assumed the helm at UPS during a global health crisis (June 2020) and immediately put her “better than bigger” stamp on the company. The strategy emphasized higher margin deliveries over volume. The results are obvious.

UPS released its first quarter financial results this Tuesday morning. UPS posted adjusted earnings per share of $3.05 on $24.4B revenue. These top and bottom lines beat Wall Street while achieving year-over-year earnings growth of 10.1% with revenue growth of 6.4%.

The firm reported a consolidated operating profit (COP) of $3.3B. This was 17.6% more than the same period last fiscal year.

Segment Performance

Domestic in the USA: Revenue increased 8% to $15.124B, driven by a 9.5% increase in revenue per piece, while operating profit increased 22.9% to $1.662B. Operating margin was 11%, 11.3% adjusted.

International: Revenue increased 5.8% to $4.876B, driven by a 10.5% increase in revenue per piece, while operating profit increased 2.9% to $1.116B. Operating margin was 22.9%, 23% adjusting.

Supply Chain Solutions Revenue increased 2% to $4.378B, led by Forwarding (+25%), while operating profit increased 47.4% to $473M. Operating margin was 10.8% with 11% adjustment.

Outlook

UPS has reaffirmed its full-year targets for 2022…

– Consolidated revenues of around $102B which is close to the consensus on Wall Street.

– Consolidated adjusted operating Margin of approximately 13.7%

– Adjusted return on invested capital above 30%.

– Capital expenditures equal to 5.4% of revenue (approximately $55B).

Dividend payments in excess of $5.2B

Furthermore… This is the headline makerUPS announced plans to double its share-repurchase program for 2022, aiming for $2B in the year.

Fundies

UPS had a net cash position at $12.545B as of March 31st and current assets at $25.601B. This was a decrease of three months. Current liabilities fell to $16.842B over the last three months. The current ratio for the firm is 1.52, which is healthy. It passes the Sarge test. Total assets are $70.113B which easily exceeds total liabilities less equity (54.679B). Net intangibles and goodwill can be combined at $6.133B. These are significant but do not affect the positive balance. Adjusted free cash flow was $3.915B for the quarter, an increase of $3.712B over the previous year.

My Thoughts

I like the quarter. I like the guidance. I like the 3.21% dividend return. I like the increased buyback. The economic environment is something I don’t like. The ecommerce boom has become a permanent condition. Even if Covid-related shut downs are not, UPS and FedEx (FDX), will likely benefit over the long-term if they do it right. Carol Tome will do an excellent job managing this company, I am certain. FDX is a company I am less confident in. This is why I am in a long position with this name and not with that name.

Even so, there is little that can be done to help if Europe’s war on terror continues to push food and energy prices higher while central banks, led Federal Reserve to fight inflation through destruction of demand. An economic slowdown will be an economic slowdown. UPS, despite its delivery services company being heavily dependent on commerce, does sell something quantifiable, and does return capital for the stakeholders. UPS is still attractive, even in this environment. Fuel prices could change, but not now.

UPS has almost completed its circle since October. Could I have sold it at $230? I think I could. This point is at the moment, not here nor there. UPS appears technically to be oversold. Since April, the stock’s relative strength reading has been hovering around 30. The Full Stochastics Oscillator shows even worse results. Despite all three components being in negative territory, the daily MACD does indicate that the stock is poised for a bullish crossover between the 26-day EMA and the 12-day EMA. That would be great.

UPS should trade down to the lows in October. My plan is to add between $180 and $175 if I have the opportunity. Here’s my current plan.

United Parcel Service 

– Target price: $241 (not very important right now).

– Pivot: $201 (200 day SMA)

– Add $180 to $175

Panic $167 (8% less than my current net basis $182) 

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