United Parcel Service: Buying Shares While It Is On The 'Operating Table'

Core Viewpoint - UPS is currently facing significant challenges due to lower volumes and higher costs, particularly from wage inflation resulting from a new contract with the Teamsters union, which has led to a decline in share performance compared to the S&P index [2][5] Current Headwinds - UPS reported a revenue of $21.7 billion for the first quarter, down 5.3% year-over-year, with diluted earnings per share of $1.43 reflecting a 35% decline compared to the same period in 2023 [5] - Average daily volume decreased by 3.2% year-over-year, with B2B average daily volume down 5.5%, primarily due to declines in retail and manufacturing sectors [5] Secular Tailwinds - Despite current challenges, e-commerce continues to gain market share, which is expected to benefit UPS in the long term [6] - UPS is expanding its addressable market share, particularly in big and bulky deliveries and healthcare logistics, aiming for $20 billion in annual revenue from healthcare by 2026 [6] Financials - The combination of higher costs and lower revenue has significantly impacted profitability, with normalized diluted earnings per share falling almost by half [7] - Management is optimistic about revenue growth in the second half of the year [7] Strong Competitive Moat - UPS maintains attractive returns on invested capital, reflecting its strong competitive moat derived from its scale advantages and logistics network [8] - The company has secured a profitable air cargo contract with the U.S. Postal Service, enhancing its competitive position [10] Returns Business - UPS is leveraging its extensive store network to expand its returns business through initiatives like Happy Returns, which offers convenient return options [11] Peers - UPS has a stronger competitive moat compared to FedEx and DHL Express, as evidenced by its superior financial metrics [12][13] Dividend Policy - UPS has a high dividend yield of approximately 4.7% and intends to maintain its dividend despite reduced earnings, with a targeted payout ratio of 50% [14][15] Balance Sheet - UPS has a strong balance sheet with significant liquidity and investment-grade credit ratings, although its debt levels have increased over the past decade [16] Outlook - UPS is guiding for fiscal year 2024 revenue between $92 billion and $94.5 billion, with long-term targets of $108 billion to $114 billion by 2026 [18] Valuation - UPS is currently trading below its ten-year average price to cash flow from operations, indicating an undemanding valuation [19]