📦 Is UPS’ New Mantra Delivering The Goods?

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Feb 03, 2022

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📦 UPS: Better & Bigger?

The world's largest courier company by market cap, UPS Inc. (UPS), had a record fourth quarter. That augurs well for the company as well as the market. But are telltale headwinds already knocking on its doorstep? (Tweet This)

The "Tome" Book Of Strategy…

Carol Tome had pretty much retired and kept herself busy at her farm in Northwest Georgia. Then came the announcement that she was UPS' next CEO, effective June 1, 2020. The pandemic was raging, the world was in lockdown, and problems seemed to be engulfing business like never before. Tome's Mantra to improve things at UPS was, "Better. Not Bigger.

UPS was on a mission to shed its underperforming assets, and it began with the sale of UPS Freight. This business was sold to Montreal-based TFI International for $800M. The price was $500M lower than what the company had paid for it in 2005. Still, the capital-intensive, low-margin business was off UPS' back for good.

The company then went about looking for efficiencies in its bread-and-butter package deliveries. In alignment with the "Better, Not Bigger" strategy, the company became pickier on what packages it chooses to deliver, not just how many. It rewrote contracts, adding an exit clause, which forced customers to either pay a higher price and accept new terms or find another service provider.

UPS also strategically reviewed its capacity, and rather than adding more warehouse space, it looked to maximize the usage of existing capacity. In addition, the company worked on adding sticky clients by winning more contracts from healthcare firms and small-and-medium-sized businesses.

These not-so-subtle yet common-sense changes started delivering results within Tome's first six months at the helm. By the end of 2020, UPS had reported a record annual revenue of $85B, along with on-time delivery performance surpassing peers. For the current holiday season, UPS saw an on-time delivery performance of 97% compared to only 88% from FedEx.

Rising shipping rates and the ubiquitous e-commerce demand has meant that UPS has had a busy 2021 as well. Covid-19 and the Delta variant did slow things down a bit even as competition increased. Undeterred, UPS defied it all during the quarter gone by.

…Is Paying Off For Now

UPS easily surpassed expectations in Q4, led by surging demand during the holiday season.

Key Highlights From Q4:

Revenue: $27.8B Vs $27.1B expected
EPS: $3.52 Vs $3.10 expected
Average Revenue Per Piece: $12.40 Vs $11.14 Y-o-Y

For the full-year 2021, revenue stood at $97B. Domestic business rose 12%, while international business grew 13% Y-o-Y. The board also increased the quarterly dividend to $1.52 per share (up 49% from last year).

In mid-2021, UPS set out to crack the $100B annual revenue mark by 2023, with operating margins in the 13.2% range. The company now expects to get there in the current year itself. In fact, UPS has projected revenue of $102B in 2022, with an expected operating margin of ~13.7%.

UPS' unionized drivers and warehouse workers earn the most in the parcel industry, which has meant less disruption on account of labor shortages. The company sees an opportunity in handling business parcels as it's less taxing on the drivers - less overall travel and drop/pick-up more packages per stop.

This euphoria meant the shareholders pushed the stock to a record high on Tuesday. However, a couple of looming issues could bring things back to terra firma. First, Amazon - UPS' largest customer. The e-commerce giant contributed 11.7% of UPS' 2021 revenue (which is down from the 13.3% mark in 2020).

Amazon is working on its logistical service. Once that's in place, whether they will still entertain UPS on an ongoing basis is unclear. However, Tome dismissed those concerns by stating the two companies have mutually agreed on the shipping volumes that need to be shared.

Omicron is still lurking out there. And as a reminder, FedEx announced on Tuesday that it was suspending its domestic express freight services due to a rise in cases. UPS too had to cut down on staff and returned rental equipment towards the end of Q4 due to a rise in cases.

UPS' "Better, Not Bigger" strategy seems to be paying off, as the numbers show. Will its largest customer throw a wrench in the works? Has the company come up with a contingency plan when Amazon does the inevitable retrench? Will UPS' projection of $100B+ in revenues still hold good in this scenario? What happens if Omicron stages a comeback as things open up?

While there aren't clear answers for these questions yet, for now, investors are soaking in the positive outlook. Carol Tome certainly has her work cut out as she works on steering UPS to bigger and better things!

Market Reaction
UPS ended at $232.11, up 0.62%. Shares surged 14% on Tuesday.

Company Snapshot 📈

UPS $232.11 +1.42 (0.62%)

Analyst Ratings (32 Analysts) BUY 59% HOLD 31% SELL 9%

Newsworthy 📰

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Later Today 🕒

Amazon.com Inc. Earnings (AMZN)
Ford Motor Co. Earnings (F)
Honeywell International Inc. Earnings (HON)
Eli Lilly and Co. Earnings (LLY)
The Carlyle Group Inc. Earnings (CG)
Cigna Corp. Earnings (CI)
ABB Ltd. Earnings (ABB)
Pinterest Inc. Earnings (PINS)
Ralph Lauren Corp. Earnings (RL)
Skechers USA Inc. Earnings (SKX)
Snap Inc. Earnings (SNAP)
Wynn Resorts Earnings (WYNN)
Penn National Gaming Inc. Earnings (PENN)
Activision Blizzard Inc. Earnings (ATVI)
Bill.com Holdings Inc. Earnings (BILL)
Biogen Inc. Earnings (BIIB)
ConocoPhillips Earnings (COP)
Cummins Inc. Earnings (CMI)
Hershey Co. Earnings (HSY)
Janus Handerson Group Plc. Earnings (JHG)
Merck & Co. Inc. Earnings (MRK)
The Timken Co. Earnings (TKR)
Unity Software Inc. Earnings (U)
7:00 PM IST: Initial Jobless Claims

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