Be Sure You Own United Parcel Service for the Right Reasons

Key Points

• United Parcel Service (UPS) looks fairly priced after earnings. 
• The shipping company was a pandemic winner, but growth is regressing to historical averages.  
• If you want to own UPS stock you should look at it for value, not growth.  

Some earnings reports are more significant than others. And that’s the sense that you got when United Parcel Service (NYSE: UPS) reported earnings on October 25, 2022. UPS stock dropped sharply after Federal Express (NYSE: FDX) delivered a warning of sharply lower shipping volumes based on the global economic slowdown. 

With that in mind, investors were looking for evidence of that slowdown in United Parcel Service’s earnings. And what they got was a mixed result. UPS scored a beat on the bottom line posting earnings per share (EPS) of $2.99 as opposed to analysts’ estimates of $2.85 EPS. But revenue was a slight miss coming in at $24.16 billion, just below the forecast for $24.32 billion. 

So how should investors think about the UPS earnings report as they consider whether to own UPS stock? That’s a question this article will attempt to answer. 

Growth is Still Good, But Not as Good 

Companies such as United Parcel Service and Federal Express in addition to, of course, Amazon (NASDAQ: AMZN) were winners as the pandemic changed shopping habits. All three companies could be considered essential businesses as people were sheltering in place.  

That growth continued even as the economy began to reopen. Not surprisingly, the company was posting double-digit increases in revenue between 2020 and 2021. And let’s be clear, the results that UPS delivered suggest that business is still strong. Revenue continues to grow on not only a sequential but a year-over-year (YOY) basis. The move to e-commerce is real and is not going away.  

There are indications, however, that revenue growth may be peaking. Few investors could expect the company to continue to post double-digit gains, And sure enough, revenue growth is back to single-digit levels, which is comparable to the company’s historical gains.  

Earnings May Come Under Pressure 

And that is likely to put pressure on earnings. For now, the company is managing to pass along costs to the consumer to make up for a decline in shipments. However, there’s no telling what the consumer’s breaking point may be. And that may be decided by retailers as well who may have no choice but to entice consumers with offers for free shipping.  

Chief Executive Office Carol Tome acknowledged as such when she remarked about the uncertain economic outlook, “We’re going to build more agility to our plan than we’ve seen before. We have to be able to turn on a dime.” 

To that end, the company is continuing to invest in automation as an opportunity to reduce costs. If those efforts are successful, Tome told analysts the company would consider passing those savings to its customers. 

UPS is Becoming What it Always Was 

Even with the contracts that UPS has with companies, the business model becomes a commodity. And that’s likely to become evident as the world navigates through this recession.  

In the short term, it’s not irrational to see the company having a strong quarter to end the year. The current quarter is typically the company's strongest quarter. And with retailers having little choice but to offer discounts, the holiday season may be stronger than expected. 

But when I look at the UPS stock chart, I see that the pandemic has been a huge anomaly. There’s nothing wrong with anomalies. And undoubtedly some investors made a nice profit. However, this looks like a time when the market may have UPS stock priced correctly.  

That’s why I say investors should buy UPS stock for the right reasons. And that would be for steady revenue and earnings – and a dividend that currently has a 3.60% dividend yield. For investors looking to stay in the market but mitigate their risk, that dividend could be a nice gift they give to themselves.