The answer is $2,200. While more than doubling his money might seem like a good result (reinvesting his dividends would bring him closer to $3,000), UPS (UPS 1.33%) and its rival fedex (FDX 0.22%) Late S&P 500 During the period. That said, I think he has good reason to believe that UPS will outperform the market in the next decade. Here’s why:
Why UPS Can Deliver Superior Performance
There are two main reasons.
- Continuing our highly successful transformation strategy and focusing on maximizing shipping profitability rather than chasing volume.
- Using new technology to improve productivity.
To assess the success of UPS’s transformation strategy (launched in 2018), we recommend looking at the stock’s performance on a 3-, 5-, and 10-year basis relative to the S&P 500 and FedEx. We stuck with the theme of investing $1,000 at the start of each period. As you can see below, UPS has significantly outperformed the S&P 500 and FedEx over the past three years and has maintained its position against the index over the past five years.
The Transformation Strategy transformed UPS’s operations and its returns.
|
$1,000 worth of investment |
last 3 years |
last 5 years |
Over the past 10 years |
|---|---|---|---|
|
UPS |
$1,520 |
$1,340 |
$2,200 |
|
fedex |
$1,200 |
$680 |
$1,858 |
|
S&P 500 |
$1,200 |
$1,400 |
$2,666 |
Data source: ycharts.com, author’s analysis.
UPS Transformation Strategy
The key objectives of strategy and CEO Carol Tomé’s ‘better, bigger’ framework are to target end markets: small and medium-sized businesses (SMBs), healthcare, high-growth international markets, and business-to-business ( Profitable expansion of B2B) and business-to-consumer (B2C) e-commerce.
This strategy was boosted during the pandemic lockdown, with SMBs and healthcare companies scrambling to establish e-commerce capabilities. As a result, these new customers are now firmly embedded in the UPS world.
UPS has significantly improved its profitability and free cash flow generation in recent years. Additionally, initiatives such as the Digital Access Program (DAP) for SMBs have helped customers reduce the complexity of e-commerce deliveries while offering discounts for high-volume shippers.
On the other hand, UPS has indicated its intention to refrain from low-margin deliveries, Amazon — “Better, not bigger” action. FYI, FedEx has terminated its contract with Amazon.
As a result, UPS increased average revenue per piece, revenue growth, operating margin and profit even as volume declined. The focus on more profitable end markets is clearly paying off.
New technology brings more profit
Contrary to appearances, the parcel delivery business is high-tech, and UPS is using more and more new technologies to improve productivity. For example, On-Road Integrated Optimization and Navigation (ORION) helps reduce mileage and improve fuel efficiency. The network planning tool eliminates unnecessary container movements and reduces trailer loads, resulting in significant cost savings.
Another example is the UPS deployment of smart packaging with RFID labels. On the third-quarter earnings call, Tome said the rate of misloading (parcels being loaded into the wrong vehicle) dropped from 400 times his usual rate to “1 times 800, 1 times 1,000.” said he did.
This may seem like a small improvement, but when replicated across UPS’s daily network, it provides significant productivity savings. According to Tome, the company plans to accelerate the use of its smart packages and smart equipment “because of the benefits we see in our business.” Additionally, automated scanning using RFID reduces the need for manual scanning.
Stocks to buy over the next decade
There is no doubt that UPS and FedEx will face some challenges in 2023. A slowing economy usually means slower growth in package deliveries. Yet much of the bad news is already reflected in the stock price, and UPS management continues to fundamentally improve the business through transformational strategies and IT investments. All in all, UPS is well-positioned to deliver significant returns to investors over the long term.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lee Samaha has no positions in any of the mentioned stocks. The Motley Fool US Headquarters recommends Amazon.com and his FedEx. The Motley Fool US Headquarters recommends United Parcel Service. The Motley Fool’s U.S. headquarters has a disclosure policy.
