United Parcel Service’s UPS efforts to reward its shareholders through dividends and buybacks vouch for its solid financial footing. However, high operating costs, mainly due to elevated fuel expenses, are restricting bottom-line growth. Currently, UPS carries a Zacks Rank #3 (Hold).
UPS’ strong free cash flow generating ability pleases us and supports its shareholder-friendly activities. In the first nine months of 2022, UPS generated a free cash flow of $8,472 million, paid out dividends worth $3.8 billion and repurchased shares of $2.2 billion. UPS aims to reward its shareholders with $8.2 billion in 2022 through dividends ($5.2 billion) and share buybacks ($3 billion).
Even though demand for online shopping slowed down from the pandemic peak with the reopening of the economy, the figures are higher than the pre-pandemic levels. To meet the demand swell in the holiday season, UPS added more than 100,000 seasonal workers throughout the United States. Additional workers are needed to ensure a repeat of UPS’ buoyant performance witnessed last year with respect to timeliness. Therefore, the decision to hire extra hands to meet the anticipated surge in package delivery demand seems prudent. A strong performance during the holiday season is likely to boost the UPS stock.
However, higher operating expenses are concerning. For example, operating costs escalated 9.7% in 2021. Due to the 66.4% jump in fuel expenses, operating costs increased 4.6% in the first nine months of 2022. Due to the persistence of high fuel costs, operating expenses are likely to soar in fourth-quarter 2022 as well.
Rising capital expenses further add to its woes. UPS now expects current-year capital expenditures to be $5 billion, well above the 2021 levels. The increased capex guidance, albeit aimed at long-term benefits, may dent the current-year profit margins.
In third-quarter 2022, shipping volumes dipped 2.1% year over year to 22.9 million. The contraction in the volume of packages shipped indicates weakening demand due to the economic slowdown. The metric had declined in the June quarter as well. This downside in shipping volumes due to softening demand is an added concern.
Stocks to Consider
Some better-ranked stocks within the broader Transportation sector are as follows:
Covenant Logistics CVLG: CVLG offers a portfolio of transportation and logistics services, including asset-based expedited, dedicated and irregular route truckload capacity, besides asset-light warehousing, transportation management and freight brokerage capability.
The gradually improving freight market scenario is a tailwind to Covenant. CVLG’s cost-control efforts are appreciated as well. CVLG currently sports a Zacks Rank #1 (Strong Buy). The stock has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 10.1% upward over the past 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Ryder System R: Based in Miami, FL, Ryder provides integrated logistics and transportation solutions. With improved economic and freight market conditions, R is benefiting from higher rental revenues owing to strong demand and favorable pricing. R’s acquisitions of Whiplash and Midwest Warehouse & Distribution System expand its e-commerce fulfillment network and boost multi-client warehousing capabilities. The transactions are expected to drive growth in the supply-chain solutions segment.
Ryder currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for R’s 2022 earnings has been revised 7% upward in the past 60 days.
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