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Here's Why You Should Retain UPS Stock in Your Portfolio Now

Strong package delivery demand and solid cash position drive UPS stock. Meanwhile, an increase in operating expenses is a headwind.

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This story originally appeared on Zacks

United Parcel Service, Inc. UPS has an impressive Growth Score of A. This style score condenses all the essential metrics from the company’s financial statements to get a true sense of quality and sustainability of its growth.  The company has an expected long-term earnings per share (three to five years) growth rate of 12%. For 2021, earnings are expected to grow at a rate of 35.6% on a year-over-year basis.  

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The stock has rallied 18% in the past year compared with 16.3% growth of the industry it belongs to.

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Key Growth Drivers

UPS’ results outperformed estimates in the second quarter of 2021, mainly owing to high package delivery demand. Its International package unit's performance was the strongest in the quarter with segmental revenues rising 30%. The international segment is anticipated to maintain its strong performance. In the international segment, management anticipates year-over-year average daily volume growth from Europe in the mid-single digits for the back half of the year. Management also expects Asia outbound volume to remain elevated relative to pre-pandemic levels. On a consolidated basis, revenue growth of 5.4% (driven by the international segment) is expected in second-half 2021. Operating margin of around 12% is anticipated in the final six months of 2021.

The company exited the June quarter with cash and equivalents of $9,954 million, up 57.6% from 2020 levels. Moreover, UPS' current ratio (a measure of liquidity) at the end of the second quarter of 2021 was 1.39, up 7.7% sequentially. This liquidity ratio measures a company's ability to pay up its short-term liabilities.

Primary Concern

Increase in operating expenses are a concern. For example, operating costs escalated 14.5% in first-half 2021, due to rise in costs at all three segments. Notably, operating expenses increased 10.9%, 24.1% and 18.7% at the U.S. Domestic Package, International Package and Supply Chain Solutions units, respectively, in the first six months of 2021. In case operating costs continue to rise, the bottom line might be affected.

Zacks Rank & Stocks to Consider

UPS currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader Zacks Transportation sector are Knight-Swift Transportation Holdings Inc. KNX, Landstar System, Inc. LSTR and Herc Holdings Inc. HRI. Knight-Swift and Landstar carry a Zacks Rank #2 (Buy), while Herc Holdings sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected earnings per share (three to five years) growth rate for Knight-Swift, Landstar and Herc Holdings is pegged at 15%, 12% and 49.2%, respectively.

 



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United Parcel Service, Inc. (UPS): Free Stock Analysis Report

 

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