Please ensure Javascript is enabled for purposes of website accessibility

Is UPS Stock a Buy?

By Lee Samaha - Jun 16, 2021 at 7:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The recent investor day presentation caused investors to rethink the thesis behind the stock.

The market didn't take too kindly to UPS (UPS 0.63%) investor and analyst day presentation and promptly sold off the stock on the day of the event. However, the market's knee-jerk reactions often prove too hasty, and I think that's the case here. Let's take a look at why investors are wrong to sell the stock off.

Why UPS stock sold off

The most likely cause of the sell-off comes down to the fact that management's guidance to 2023 didn't quite live up to expectations. Or at least it didn't live up to Wall Street analyst consensus estimates on one critical metric, free cash flow (FCF).

Someone holding parcels at house door.

Image source: Getty Images.

It's always a key metric to follow because it's what's left from earnings after the working capital necessary to run the business is taken out, and capital expenditures (CAPEX) are made. In other words, it's the cash generated in the year that a company could use to pay off debt, buy back stock, pay dividends, or engage in mergers and acquisitions.

To elucidate matters further, here's a look at the guidance from the event compared to the analyst consensus going into it. The comparison shows revenue guidance in line with, and operating profit guidance better than, market expectations going into the event. However, the transportation giant will make more capital expenditures than expected. Consequently, the capital spending will eat into FCF generation, and FCF guidance is lower than what the market had penciled in.

UPS Metric


Wall Street Consensus

Revenue 2023

$98 billion to $102 billion

$99.9 billion

Adjusted operating profit 2023

$12.4 billion to $14 billion

$12.3 billion

Adjusted operating profit margin 2023

12.7% to 13.7%


Capital spending 2021-2023

$13.5 billion to $14.5 billion

$13.4 billion

Free cash flow 2021-2023

$24 billion to $27 billion

$27.3 billion

Data source: UPS presentations,

Why it matters

This matters because investors often use FCF to value companies. Since FCF guidance is lower than analyst expectations for 2021-2023, it's understandable if some investors want to sell the stock. Furthermore, the capital spending requirements of UPS (and FedEx, for that matter) are watch items. It's no secret that e-commerce volumes are burgeoning, but both companies have had to significantly ramp capital spending in recent years to build out capacity to service it.

UPS and FedEx charts showing drop in capital expenditures and rise in free cash flow.

Data by YCharts.

The concern is that both companies are in a cycle of increasing capital spending that will lower FCF generation. In this context, any sign of increased capital spending by UPS is likely to trigger concern among investors.

Why the market is wrong

On the other hand, there are two primary reasons why I think the sell-off is unwarranted. First, the capital spending isn't anything out of historical context, and the majority of it will be to fuel growth in the business.

In fact, 65% of the capital spending is earmarked for growth investments. Investors shouldn't be afraid of growth investments. The fundamental reason why investors put money into companies is that they (investors) believe that management can generate a better return on their money than they can.

Moreover, the capital spending plans represent 4.5% to 5.5% of expected revenue in the period, and that's not something out of sync with what UPS has traditionally spent.

UPS chart showing drop in CAPEX to annual revenue.

Data by YCharts.

Furthermore, management is quite clear that the company's investments come under CEO Carol Tome's "better, not bigger" framework. In other words, UPS's focus is on expanding selective and profitable revenue streams (such as the emphasis on small and medium-sized businesses and healthcare) rather than just chasing volume growth overall.

Parcels on doorstep.

Image source: Getty Images.

Second, as you can see in the table above, operating profit and operating profit margin guidance is higher than what the market expected it to be in 2023. Granted, FCF is still the most important metric to follow. However, if the capital spending results in higher profit margins over the long term, then it will drop into FCF in the long run. That's particularly the case when UPS dials back growth investments in the future.

UPS is still a buy

All told, management's guidance needs should be put into context by investors, and that context is one of a company set to expand margin and revenue over the next three years. In the meantime, UPS management is positioning the company for greater FCF generation over the long term. That's a major plus, not a minus.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FedEx. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
$206.28 (0.63%) $1.30
FedEx Corporation Stock Quote
FedEx Corporation
$232.56 (-0.37%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.