UPS Delivers Results, Shares Surge
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We Think UPS Could Hit $240 Quickly
UPS (NYSE: UPS) has been working on a “better not bigger” strategy for several quarters now and those efforts are paying off. The company, also boosted by consumer trends ie eCommerce, has not only weathered the pandemic but also been able to produce a sustained bout of revenue growth acceleration. Growth is underpinned by rising demand in all segments and bolstered by price increases both internal and demand-driven putting the company on track to sustain growth accelerating into the end of the year at least. Based on our assessment of the economy, the Q1 results, and a look at the chart of monthly UPS price action we think this stock is heading to $240
UPS Has Blowout Quarter, Affirms CAPEX Plans
UPS had a great quarter. The company not only blew past the consensus but its growth is accelerating on the eve of what we believe will be a very robust economic recovery. The $22.19 billion in net revenue grew 27% over the last year and beat the consensus by 1000 basis points. STrength was seen in all segments with increases in both volume and revenue per piece. The average daily volume is up 14% from last year and last year was not easy comp, last year the company reported a 5% YOY increase in the Q1 period, and there was a 10% increase in revenue per piece.
The International segment saw the biggest increase but all grew by double-digits. International revenue grew by 36% while Supply & Freight grew 34% and U.S./Domestic a smaller 22%. Looking forward, revenue will be negatively impacted by the sale of the Freight segment but core strength is still expected. Supply & Freight together accounted for about 20% of net revenue in Q1. Proceeds from the sale will be used to pay down debt and help position the company for additional growth.
Moving down to the bottom line the results are equally impressive. The $5.47 in GAAP EPS beat the consensus by $3.79 but there is a mitigating factor. The company benefited from positive mark-to-market gains in relation to its pension liabilities that freed up $2.70 per share in cash. On an adjusted basis, the $2.77 in EPS still beat by more than a dollar and is up 162% from last year.
UPS Is Putting Cash To Good Use, Increases Dividend Safety
UPS put some of its cash to good use by paying down some of its debt. The company paid off $1.5 billion in the first quarter of an expected $2.5 billion in total for the year. This helps free up more its cash flow and strengthens the dividend which is yielding a market-beating 2.32%. The company is a dividend-grower, as well, which adds to the appeal but we don’t expect to see large increases this year. Aside from the fact that the distribution CAGR is a low 6% we think paying down debt is a better way to go. Regardless, UPS is on track to continue paying and increasing its dividend and pay down debt this year and next.
The Technical Outlook: UPS Pops To New All-Time High
Shares of UPS gapped open and extended their gains to over 10% following the Q1 earnings release but that is not what surprised us. What surprised us is just how incredibly bullish the monthly chart looks. This chart shows a textbook bullish flag continuation pattern and one that is breaking out to the upside at that. This pattern suggests a continuation of the underlying trend that will be equal to the flagpole or roughly $80 to $90 dollars. Projecting that figure from the flag itself, near the $160 level, we get a range of $240 to $260 and it could be reached in the next two to three months.
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