United Parcel Service’s [UPS] share price has delivered this year, driven by the boom in online shopping during the coronavirus pandemic. However, after surging to $175.47 on 12 October, UPS’s share price tumbled 11.6% to $154.84 on 28 October, the day the company released its third-quarter earnings. As of 14 December’s close, UPS’s share price is up 42.67% for the year at $166.62.
UPS’s share price started 2020 at $113.29, before slipping to a low of $84.22 on 12 March as coronavirus fears hit markets. UPS’s share price rose to $97.52 on 26 March, but dropped again to $87.97 on 3 April as global lockdowns dampened business demand and hit freight volumes on passenger aircraft.
However, as lockdowns eased, UPS’s share price began to recover, hitting $118.14 on 28 July. It accelerated to $139.71 on 30 July after it revealed that consumer e-commerce demand and COVID-19-related healthcare shipments had seen second-quarter revenues jump 13.4% to $20.5bn. Its average daily volume zoomed up by 22.8%, reaching 21.1 million packages a day.
A weakened fourth quarter
UPS’s share price drop in late October was blamed on comments from Brian Newman, CFO at UPS, who said that lower profit margins and employee benefit costs would lead to a weaker fourth quarter. However, UPS’s share price kept motoring, dropping to $172.69 on 24 November and $168.40 on 11 December.
This fall was despite UPS reporting a 15.9% increase in Q3 revenues to $21.2bn, due to high e-commerce traffic and strong outbound demand from Asia. It also noted growth from small and medium-sized businesses, helped by its Digital Access Program, which offers online vendors, merchants and payment providers attractive rates.
UPS' Q3 revenue - a 15.9% rise
Much of the recent (albeit choppy) momentum has come from investors’ expectations of a bumper e-commerce Christmas holiday season as shoppers remain in lockdown or keen to avoid crowded malls. According to research by PYMNTS.com, 74.1% of holiday shoppers in the US are buying online this year, up 12.7% from 2019.
UPS has had its fair share of festive cheer before. For its fourth quarter in 2019, it reported an 8.8% hike in earnings per share to $2.11, helped by strong average daily volume growth in the peak holiday season. In the same period in 2018, it announced record shipments. For those familiar with receiving oversized multicoloured jumpers or three identical tin openers, UPS also recorded 1.9 million parcel returns on National Returns Day in the US on 2 January in 2020.
“This year, we’ve seen a massive acceleration towards the online world. The pandemic turned what would have occurred over several years into a near-overnight evolution,” said Lenore Hawkins, strategist with Tematica Research, a partner on the Digital Infrastructure and Connectivity UCITS ETF [DIGI.L].
Indeed, demand has been so high that UPS told its drivers not to pick up packages from six retailers including Gap during the recent Cyber Monday online shopping event, reported The Wall Street Journal.
Regarding these temporary limits, Glenn Zaccara, director of media relations at UPS, told CNBC: “If the demand exceeds the planned allocations, UPS will work with our larger customers to ensure the volume gets picked up and delivered as more capacity becomes available in our network.”
This raises concerns over further delivery crunches and costs for UPS in the weeks ahead, but it also reveals that bumper online holiday sales forecasts are already well on track.
“If the demand exceeds the planned allocations, UPS will work with our larger customers to ensure the volume gets picked up and delivered as more capacity becomes available in our network” - Glenn Zaccara, director of media relations at UPS
Daniel Foelber, writing in The Motley Fool, believes UPS has a bit of everything. “It has growth prospects… and an impressive dividend that should continue to increase,” he says. “Pessimistic fourth-quarter guidance and a strong holiday season offer plenty of short-term upside, but long-term investors will be even more interested in the company's e-commerce investments, international strength, and ability to generate tons of cash.”
Among 27 analysts polled on Market Screener, UPS has a consensus Outperform rating and an average target price of $171.68. This would represent a 3% upside on 14 December’s closing price.
“Pessimistic fourth-quarter guidance and a strong holiday season offer plenty of short-term upside, but long-term investors will be even more interested in the company's e-commerce investments, international strength, and ability to generate tons of cash” - Daniel Foelber
Credit Suisse has an Outperform rating because it believes revenue quality is improving, with strong growth in small and midsize businesses, and that the opportunity for it to improve profitability may be larger than previously anticipated.
Zacks Equity Research has a Buy rating on the stock, citing the potential of its Healthcare unit for distributing new COVID-19 vaccines worldwide. In its Q3 announcement, UPS said that it was expanding its “freezer farm capacity” which will help to store the vaccines.