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Why Shares of United Parcel Service Gained Ground in August

By Lou Whiteman – Sep 2, 2020 at 10:20AM

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UPS margins appear to be holding up better than expected as the company deals with a flood of pandemic-related e-commerce business.

What happened

Shares of United Parcel Service (UPS 1.33%) were up 14.6% in August, according to data provided by S&P Global Market Intelligence, building on late-July gains after solid second-quarter results. UPS has held up well through the pandemic and appears to have some pricing power heading into the winter holiday season, giving investors plenty of reason to get excited.

UPS Chart

UPS data by YCharts.

So what

COVID-19 has altered business for UPS and other transportation companies, causing some disruptions to operations but also adding new opportunities as e-commerce flourishes. We didn't really know how that would all play out in terms of earnings until July 30, when UPS delivered a quarter that far exceeded expectations.

A UPS truck at a loading facility.

Image source: United Parcel Service.

UPS shares spiked higher after that announcement, and the enthusiasm continued through the first week of August as analysts reset expectations higher. UPS also got a boost from reports indicating that the company intends to add holiday fees for large shippers.

The fees are designed to offset the added costs from an increase in volume during the pandemic. For UPS to telegraph its intention this far in advance, when large retailer customers presumably still have time to adjust to the fees and move business elsewhere, implies that UPS is confident that with all shipping companies facing increased loads, there's not a lot of slack to take in any customers who want to go elsewhere.

That sort of pricing power should bode well for future quarterly results.

Now what

UPS shares have had a huge jump to the upside on all of this news because the positivity goes against the conventional wisdom on the shippers heading into earnings season. While everyone knew e-commerce volumes were likely to surge, that business-to-consumer segment is traditionally one of UPS' poorer-performing businesses, and there were fears it would wipe out margins.

Overall operating margins fell in the quarter, but only by a modest 60 basis points. That resilience, coupled with UPS planning to add fees heading into the holidays, goes a long way toward reassuring skeptics that the pandemic-related e-commerce surge is going to be a net positive -- not a drain -- on results.

With the pandemic-related cloud of uncertainty beginning to lift, investors are feeling much more confident buying into UPS.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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