UPS(NYSE: UPS) charts its own course. That's the key takeaway from the company's recent second-quarter earnings report. Despite fears over a slowing economy impacting its delivery volumes, UPS demonstrated that its long-term earnings aren't just about mirroring trends in the economy. As such, investors can feel confident that UPS will emerge from any weak economy in good shape, which makes the stock a buy. Here's why.
The starting points for the investment case for UPS stock
Investors often follow UPS, FedEx, and the rest of the transportation sector because they are key barometers of broader market conditions. That remains the case, but it's a little bit different with UPS right now, and understanding why is a key part of appreciating the stock's investment case.
There are two critical parts to the argument. First, while Amazon.com(NASDAQ: AMZN) is rapidly expanding its online sales and its own delivery network, it does not pose an existential threat to UPS and FedEx. In fact, there's more than enough delivery volume to go around, and UPS' "better, not bigger" strategy implies being more selective over deliveries.
Second, UPS is making substantial progress in its transformational strategy. The aims of which are focused on developing relationships with small and medium-sized businesses (SMB), healthcare, business-to-business (B2B), and "certain large enterprise accounts," as CEO Carol Tome put it on the earnings call.
As such, UPS continues to focus on its transformational strategy while being more selective over delivery arrangements. It's not about chasing delivery volume for volume's sake; it's about chasing profits. A demonstration of that comes from UPS willing to forego deliveries for Amazon. Tome outlined on the earnings call, "we've contractually agreed on what makes sense for us versus what makes sense for them. That means that both volume and revenue for Amazon is coming down." She further outlined that Amazon would represent less than 11% of UPS's total revenue by the end of the year. Instead of chasing less-profitable Amazon deliveries, UPS aims to grow "SMB and B2B and healthcare" and other revenue sources.
The transformational strategy is working
The following table details UPS' core U.S. Domestic Package segment metrics in the second quarter. The table shows how the segment's overall volume declined in the quarter, with more than half the decrease "due to actions we took with a few of our largest customers," according to CFO Brian Newman, most of it coming from business-to-consumer (B2C) volume declines.
UPS management thought it would offset the decline with increases elsewhere, but Newman said the economy "made that challenging." There's little UPS can do about that, but as you can see below, its B2B volume rose, and its SMB volume rose. Moreover, and partly connected to the B2B and SMB volume increase, UPS managed to increase its average revenue per piece. The end result was a 7.3% revenue increase accompanied by a margin increase and a 16.7% increase in operating profit.
UPS U.S. Domestic Package
Second Quarter Year-Over-Year Change
Average revenue per piece
Adjusted operating margin
Up 40 basis points, representing an increase from 11.6% in Q2 2021 to 12% in Q2 2022
SMBs now make up 29.2% of UPS' domestic volume compared to 27.2% a year ago, and Tome outlined how its new pricing platform "Deal Manager" simplifies pricing for SMBs, and would be rolled out internationally as well. Meanwhile, its highly successful digital access program (DAP) is helping SMBs with its discounted rates, delivery guarantees, and tracking solutions. As such, management confirmed that DAP was on track to generate $2 billion in revenue in 2022.
UPS will emerge stronger
The slowing economy will hit UPS, but if the second quarter is a guide, management won't abandon its strategy of focusing on its selected growth markets while being more selective over deliveries. That's good news because it means UPS can carry on making progress on its strategy even if overall end demand for deliveries is slowing due to a weak economy. The transformational strategy is working to expand revenue and margin, and UPS remains an excellent option for dividend investors.
10 stocks we like better than United Parcel Service
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and United Parcel Service wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of July 27, 2022
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.