VALUATION HIGHLIGHTS
- US Domestic Package (Next Day Air, Domestic Deferred Package, Domestic Ground Package) constitutes 66% of the Trefis price estimate for UPS's stock.
- International Package (International Domestic Package, International Export Package, International Cargo) constitutes 20% of the Trefis price estimate for UPS's stock.
- Supply Chain and Other Businesses constitute 13% of the Trefis price estimate for UPS's stock.
WHAT HAS CHANGED?
- UPS Stock vs. S&P 500 Performance
- The changes in UPS stock over the recent years have been far from consistent. Returns for the stock were 30% in 2021, -15% in 2022, -6% in 2023, and -16% in 2024.
- In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that UPS underperformed the S&P in 2023 and 2024.
- Q4 2024 Performance
- UPS posted a 1.5% rise in revenue to $25.3 billion in Q4 2024. Supply Chain Solutions segment sales were down 9%, while the U.S. Domestic Package sales were up 2.2% and the International sales rose 6.9%. The consolidated adjusted operating margin stood at 12.3%, versus 11.2% in the prior-year quarter. Looking at the bottom line, adjusted EPS rose to $2.75 in Q4'24, versus $2.47 in the prior-year quarter.
- Volatile fuel prices
- Crude oil prices experienced a sharp downturn in 2020, exacerbated by an oil price war initiated by Saudi Arabia. Specifically, the US WTI price plummeted from over $50 in late January to below $15 by April 28, 2020, marking a 70% decrease. However, the market has seen a recovery in subsequent years, with US WTI reaching approximately $81 in 2024. For UPS, increased oil prices lead to higher operational costs, though the company's practice of adjusting freight rates through fuel surcharges helps to mitigate the negative impact on its profitability. Looking ahead, a moderate decrease in oil prices is anticipated for 2025 and 2026.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of UPS that present opportunities for upside or downside to the current Trefis price estimate.
UPS EBITDA Margin
- UPS EBITDA Margin: While UPS's EBITDA margins have historically remained within the 13% to 17% range, registering at 13.8% in 2024, we project an increase to over 17% by the end of our review period in 2031. However, a more significant improvement, pushing EBITDA margins beyond 20%, could lead to a substantial upside of over 25% in our estimated price for UPS.
BUSINESS SUMMARY
United Parcel Service, Inc. ("UPS") stands as the world’s largest package delivery company, a powerhouse in the U.S. truckload sector, and a global leader in supply chain management. It now delivers packages every business day from nearly 2,000 locations worldwide to over 10 million consignees in more than 220 countries and territories.
At its core, UPS specializes in the delivery of packages and documents across the globe. Its service portfolio also includes comprehensive global supply chain solutions and truckload transportation services primarily in the United States. In addition, the company operates other business units such as Mail Boxes Etc. and UPS Capital.
Today, UPS boasts a ground fleet of over 125,000 vehicles that reaches every business and residential zip code in the contiguous U.S. It also manages an air fleet of approximately 700 aircraft, ranking it among the largest air carriers worldwide. The company’s primary air hub remains Worldport in Louisville, Kentucky, complemented by regional air hubs in Hartford, Connecticut; Ontario, California; Philadelphia, Pennsylvania; and Rockford, Illinois. Its largest international air hub is located in Cologne, Germany, with additional regional hubs in Miami, Florida; Ontario, Canada; Hong Kong; Singapore; Taiwan; and China.
SOURCES OF VALUE
The US Domestic Package segment is the most valuable to the company because of the following reasons.
Highest number of shipments for US Domestic Package division
UPS's US Domestic package division handles a significantly larger volume of shipments compared to both its International Package division and UPS Freight. In fact, the number of packages transported by the US Domestic division is nearly six times the volume of the International Package division. This substantial difference is primarily driven by the thriving e-commerce industry. With the North American e-commerce market projected to expand at a double-digit rate in the coming years, we anticipate continued growth for UPS's US Domestic Package segment.
KEY TRENDS
Growing U.S. e-commerce industry
The expansion of the e-commerce sector is a significant catalyst for volume growth within UPS's U.S. Domestic Package segment. This is driven by the increasing convenience and accessibility of online shopping, facilitated by the widespread use of smartphones and tablets, alongside greater internet availability. Furthermore, many traditional retailers have established online platforms to serve the expanding online consumer base. Attractive deals and discounts offered online also incentivize customers to choose web-based purchases over traditional in-store shopping. Consequently, UPS's package volume is directly correlated with e-commerce activity, as numerous online retailers rely on UPS's services to provide efficient and affordable delivery to their customers.
Global Sourcing
The growth of international trade in finished goods naturally leads to an increase in long-distance package shipments. However, the advantages of this trend for UPS extend beyond just the expansion of the parcel delivery market. The increasing practice of global sourcing, where businesses in developed countries purchase materials from overseas, presents further opportunities. While global sourcing can create complex supply chains and introduce new risks for businesses, it also highlights the appeal of outsourcing supply chain management, particularly for those navigating import/export regulations and international logistics for the first time. UPS Supply Chain Solutions is positioned to leverage the anticipated growth in the demand for third-party supply chain management services.
