Waiting for the right package is better than getting the wrong one right away.
That could be the lesson with United Parcel Service (UPS) right here. The transport giant delivered soft guidance, at the low end of the range, a few weeks ago, due to consumer weakness in March and into April. The shares promptly fell by more than 10% and have languished ever since, down 2% year-to-date. Major retailers that reported recently have confirmed sector weakness, especially in electronics, as discretionary income has shifted from goods to services.
But the slump in consumer goods spending offers an opportunity to buy shares of UPS -- one of the best-managed companies on the market. Helping carry UPS are secular tailwinds at a 15-times price-to-earnings, well below the market multiple.
The current state of the stock market can make investors feel foolish for owning any stock not tech or AI-related. A handful of tech giants account for the entire 8% gain in the S&P 500 this year. Wall Street has shunned most other economically sensitive sectors, anticipating recessionary conditions. Buying well-managed out of favor stocks with valuation and dividend support in growth sectors still makes sense. UPS is investing in efficiencies throughout the economic weakness, positioning the company to outperform in the next upturn.
As the world's largest parcel delivery company and a leader in global logistics and supply chain coordination, UPS is highly sensitive to the macro environment. Yet, UPS has gained market share with small businesses for 11 straight quarters and has vastly expanded logistics in health care, which will produce $10 billion in revenues this year.
Online purchases and direct sales to consumers have a secular tailwind, notwithstanding the readjustment back to normalcy from the pandemic surge. UPS' revenue has declined 3% from its peak in 2022 after surging 35% since 2019. While earnings have fallen 16% along with package volume, the declines mask the underlying drive for efficiencies by the CEO, Carol Tomé.
Under Tomé, UPS has adopted a "better, not bigger" strategy. Even as revenue fell short this quarter, operating profits and margins were in line due to the efficiency drive. The improved productivity, even with less volume, is novel for UPS and bodes well for the future when volume improves.
A visit to a UPS store highlights added efficiencies for consumers from years past. UPS is rolling out self-serve kiosks to supplement the improved package onboarding scanning process, leading to far lower wait times.
Strong free cash flow has allowed for dramatic raises in the dividend and buybacks in recent years. This year UPS will pay $5.4 billion in dividends and $3 billion in buybacks -- a combined return to shareholders close to 5%. The stability of UPS lends well to writing calls to add to the potential return. UPS's $175 calls for July expiration currently trade for around $5 -- adding around 2.5% to the return and a margin of safety.
There's an infusion of uncertainty in UPS due to touchy negotiations with the Teamsters Union for its contract expiring on July 31. The CEO expressed confidence in reaching a deal by the deadline. Indeed, a resolution of a contract agreement would be a catalyst for shares; on the other hand, a union strike is a looming risk.
While investors pile into tech and AI, it's an opportune time to buy out-of-favor quality on sale. With 2023 likely to be a macro trough, the times will be a-changing and the market will experience a rotation back to economically sensitive sectors; so to quote Bob Dylan, "The slow one now will later be fast...And the first one now will later be last."