The bull-and-bear debate over UPS (UPS 0.38%) rages on, and the recent Investor and Analyst Day presentation only added more fuel to the fire. Management sought to lay out its three-year targets to investors and, in doing so, convince them that it was back on track after a challenging 2023. Let's take a look at the bull and bear cases for the stock in light of the presentation.
What the bears and bulls are arguing over
It's important to understand that UPS is considered a good value stock based on the three-year targets. However, this is dependent on investors having faith in the guidance. This is not a debate about valuations; it's about investors' assessment of the likelihood of management achieving its goals.
The three-year targets are as follows:
- Revenue to increase from $91 billion in 2023 to a range of $108 billion to $114 billion in 2026.
- Adjusted operating profit to grow from $9.9 billion to a range of $14.3 billion to $14.9 billion.
- Free cash flow to rise from $5.2 billion in 2023 to $7 billion in 2026, with a cumulative $17 billion to $18 billion from 2024 to 2026.
As such, management expects double-digit annual profit and cash-flow growth over the next three years as the company recovers from a difficult 2023 characterized by disappointing delivery volumes and a labor dispute that resulted in customers switching to other networks.
The bulls' case for UPS
The bullish argument for the stock rests on three key arguments:
First, UPS has a significant opportunity to grow by winning back customers lost due to the protracted labor dispute. Combined with a return to rising delivery volume, UPS can recover strongly through 2024. Indeed, management expects volumes to begin increasing again by the second half of the year.
Second, the targets are based on further leveraging the already strong trends that management has actively directed the business toward. For instance, UPS aims to become the top provider for "premium small packages" by expanding its market share in the small and medium-size business (SMB) segment. Additionally, it intends to establish itself as the leading provider of "premium logistics" by becoming the foremost complex healthcare logistics provider.
There's reason for investors to have confidence in both goals. For example, UPS expanded its penetration of the U.S. SMB market from 27% in 2021 to 29% in 2023, resulting in a 12% boost in revenue per piece (RPP). Management expects to get to 35% in 2026 and 40% in the longer term.
Image source: Getty Images.
Turning to healthcare, UPS achieved its target of increasing healthcare revenue at a compound annual growth rate of 12.6% to $10 billion from 2020 to 2023. Now the next step is to double it to $20 billion in 2026. . Given management said its healthcare business came with a high-teens profit margin, compared to a 10.9% adjusted operating profit margin in 2023, a surge in healthcare revenue implies margin expansion.
Third, the company's investment in automated and robotic facilities, smart package facilities, and digital twin modeling of operations will improve productivity and enable it to cut cost per piece (CPP) by consolidating facilities.
As such, management expects to grow its RPP by 2.5% annually compared to a 1% annual increase in CPP in the U.S. A combination of those two factors and volume growth will more than offset wage increases, leading to the profit growth outlined above.
The bears' case for UPS
In response, the bearish case is relatively simple.
- UPS has a recent track record of missing its volume expectations, so why trust the leadership team now?
- The plan relies on a significant increase in RPP, but by management's admission, the market is competitive and characterized by excess capacity versus demand currently.
- As I've previously discussed, the company's guidance for the first quarter (adjusted operating profit down a whopping 40%) makes its full-year 2024 forecast look questionable.
Is UPS stock a buy?
Management can be forgiven for the lower sales in 2023. Additionally, the industry's excess capacity is expected to return to normal levels as consumers shift their spending back to products after focusing more on services (such as travel and leisure) in the wake of easing pandemic-era restrictions. Furthermore, UPS has a strong track record of increasing RPP, and the company's plan is centered on two key areas (SMBs and healthcare) where it's already performing well.
That said, the full-year 2024 guidance is a concern, and the last thing investors want to hear is that UPS will miss its year-end targets as it embarks on a three-year journey toward ambitious aims. As such, it's prudent to wait and see what executives say about its full-year 2024 forecast on its first-quarter earnings call before buying in.
