Text size
Until recently,
United Parcel Service
operated a little like the New York Yankees. But the company has changed in ways that are positive for the stock.
Investors, along with baseball fans, may know that the Bronx Bombers have maintained an appearance policy that is unique among major league clubs. Most facial hair is banned: Yankees are clean cut.
Investor probably aren’t aware, however, that until recently, UPS (ticker: UPS) had a similar policy. Up until two years ago, UPS drivers, clad in their neatly pressed brown uniforms, didn’t sport facial hair or tattoos.
It was simply corporate policy. It started generations ago to help UPS gain a competitive edge. Delivery people that could go in the front door instead of the loading dock could be faster and build a bond with business operators.
But 1907, the year UPS was founded, is more than a century ago, and times change. CEO Carol Tome relaxed the policy when she took over at UPS in the middle of 2020, though there are still limits. Beards are supposed to be neatly maintained and tattoos on faces or hands aren’t allowed.
“That hadn’t been allowed here, let people be themselves,” CFO Brian Newman tells Barron’s. He believes the change has benefited his company. “In a time of pandemic, with a lot of challenges, people [felt] better about coming to work at UPS,” he says.
Tome arrived at UPS in June 2020, early enough in the Covid-19 pandemic that no one knew how things would turn out. The result to date is so far, so good.
UPS shares have returned about 37% a year on average since Tome began, while the
S&P 500
has returned about 14%. The comparable figure for the
Dow Jones Industrial Average
is about 13%.
The story, of course, goes beyond beards and tats. Newman says that Tome has brought a focus on “better, not bigger,” which included looking more closely at per-package profitability, as well as going after small and medium-size customers.
The idea of focusing on the profitable packages might seem obvious. But UPS is a complex network and allocating costs appropriately is no easy task. Newman and Tome, with her background as CFO of
Home Depot
(HD), worked to develop systems that could more accurately reflect what types of business offered the highest profits.
Tome also directed resources to smaller customers, which are more profitable for her company. Small and medium businesses now account for about 27% of sales at UPS, up from about 23% a year ago. Newman believes 30% is possible.
All of those changes are showing up in the financial statements. Operating profit margins have increased by about 3 percentage points, to roughly 13.5% from 10.5%, since 2020. Newman believes the profit-improvement game is still in the “early innings” and is working to improve margins about 0.5 percentage point a year for the foreseeable future.
While Newman’s excitement about the future is palpable, analysts aren’t quite convinced. Only about 47% of those covering UPS stock rate shares at Buy, while the average Buy-rating ratio for stocks in the S&P 500 is about 58%.
A big reason for the below average Buy ratio is margins. Wall Street projects operating profit margins will decline by almost half a percentage point between 2022 and 2024—the opposite of what Newman expects.
If things go as Newman foresees, however, UPS’s operating profit could hit about $15.8 billion in 2024. That is about $1.5 billion more than Wall Street currently projects.
That would add, roughly speaking, another $1.60 in EPS by 2024, for a per-share profit of about $15.41 for the year. To reach that level from the $12.77 in EPS expected this year, profits would have to grow at an annual average of about 10%. That is about 3 percentage points better than the earnings growth expected for the S&P 500.
If UPS manages to pull that off, shares could turn out to have been a bargain at the current level. UPS stock trades for roughly 13.8 times estimated 2023 earnings, while the S&P 500 trades for about 15.7 times. If UPS shares trade at a valuation similar to that for the overall market, UPS shares could hit $240 over the coming 12 months, for a gain of about 30% from recent levels.
Slower economic growth is the biggest risk to Newman’s vision. It could make it difficult to expand profit margins, and boost the stock price relative to expected earnings.
But UPS isn’t the only company that would be hit by a slowing economy. And if recession is in the cards, investors still have Tome at the helm. Given the first couple of years of her tenure, that should help them rest easy.
Write to Al Root at [email protected]
Source: https://www.barrons.com/articles/ups-stock-cfo-ceo-outlook-51656376872?siteid=yhoof2&yptr=yahoo