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UPS Benefits From E-commerce Growth Amid Capex Woes

Zacks Equity Research

We recently updated the research report on United Parcel Service UPS. The company is gaining momentum backed by e-commerce growth. However, high capital expenditures are limiting bottom-line growth.

Factors Narrating UPS’ Growth Story

We are impressed with the company’s efforts to its reward investors. In 2018, UPS rewarded its shareholders to the tune of $4.2 billion through dividends ($3.2 billion) and buybacks ($1 billion).  Continuing its shareholder-friendly approach, in February 2019, this Zacks Rank #3 (Hold) company raised its quarterly dividend by 5.5% to 96 cents per share. Moreover, share repurchase is expected to be around $1 billion in 2019.

Additionally, UPS' solid free cash flow is encouraging. In 2018, the company’s free cash flow surged to $6.13 billion, exceeding its expectation. Robust free cash flow generation by UPS supports the possibility of a dividend hike in the near future. For 2019, the company expects adjusted earnings per share between $7.45 and $7.75, higher than $7.24 per share registered in 2018. The company's transformation plan, unveiled in September 2018, should aid bottom-line growth. Furthermore, operating profits in 2019 at each segment are anticipated to grow in double-digits. UPS' efforts to expand globally also raise optimism in the stock.

Solid e-commerce growth is a huge positive for the company and has been aiding results for the past few quarters. The company anticipates cross-border e-commerce volume to grow by 28% during the 2019-2021 period. Additionally, UPS hired roughly 100,000 seasonal workers during the season (November 2018 to January 2019) to meet the surge in demand and ensure a successful holiday season. These efforts bore fruit as its on-time performance with respect to shipments improved year over year in the peak holiday season.

Moreover, the deal with e-commerce firm Inxeption, inked in March 2019, is aimed at simplifying business to business (B2B) logistics. In fact, B2B e-commerce is a fast-evolving market and expected to reach $1.8 trillion by 2023, according to market research firm – Forrester.

United Parcel Service, Inc. Price

 

United Parcel Service, Inc. Price | United Parcel Service, Inc. Quote

Concerns

Following rapid growth in e-commerce, UPS made significant investments to upgrade its facilities for meeting the surge in demand. Markedly, the company spent $6.6 billion as capital expenditures (adjusted) in 2018, the bulk of which was directed toward new technology, aircraft and automated capacity. This reflects a massive increase in investments from the 2016 level, when the company spent nearly $3 billion toward capital expenditures. For 2019, capital expenditures are anticipated to be between 8.5% and 10% of revenues. High capital expenditures might hurt its bottom-line growth.

Also, trade-related uncertainty with China might hurt the stock as UPS has Chinese exposure. With Amazon.com AMZN looking to expand its logistics network, competition is likely to intensify for UPS. Additionally, recommendations from a task force appointed by President Trump suggested that the United States Postal Service (“USPS”) should raise the price for shipping packages. The move might hurt online retailers like Amazon.com and eBay significantly. It may also hit the likes of UPS apart from rival FedEx FDX as these companies often use USPS for the last mile delivery.

Although the labor deal approval by its freight workers was a breather, we note that the turmoil leading to the voting procedure affected fourth-quarter 2018 results of UPS’ freight division. Prior to the voting procedure, UPS had stopped pickups for its freight customers. The move was aimed at emptying its freight network of any cargo that would have been stranded in the event of a strike materializing, had the voting procedure not been in favor of the company.

A Key Pick

Investors interested in the Zacks Transportation sector may consider Azul AZUL sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Azul have rallied more than 10% on a year-to-date basis.

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