The answer is $2,200. While more than doubling your money might seem like a good result (it's close to $3,000 if dividends were reinvested), the performance of UPS (UPS 0.02%) and its rival FedEx (FDX 1.37%) lagged the S&P 500 over the period. That said, I think there's good reason to believe UPS will outperform the market over the next decade. Here's why.
Why UPS can outperform
There are two key reasons:
- Continuation of its highly successful transformational strategy and its focus on maximizing the profitability of deliveries rather than chasing volumes.
- Use of new technology to improve productivity.
To gauge the success of UPS' transformational strategy (launched in 2018), it's a good idea to look at the stock's performance on a three-, five-, and 10-year basis versus the S&P 500 and FedEx. I've stuck to the theme of investing $1,000 at the start of each period. As you can see below, UPS has notably outperformed the S&P 500 and FedEx over the last three years and held its ground versus the index in the previous five years.
The transformational strategy has transformed UPS' operations and its returns.
|
Value of $1,000 invested |
Over prior three years |
Over prior five years |
Over prior 10 Years |
|---|---|---|---|
|
UPS |
$1,520 |
$1,340 |
$2,200 |
|
FedEx |
$1,200 |
$680 |
$1,858 |
|
S&P 500 |
$1,200 |
$1,400 |
$2,666 |
Data source: ycharts.com, Author's analysis.
UPS' transformational strategy
The main aim of the strategy and CEO Carol Tome's "better, not bigger" framework is to focus the company on growing revenue in targeted end markets, namely small and medium-size businesses (SMBs), healthcare, high-growth international markets, and profitable expansion in business-to-business (B2B) and business-to-consumer (B2C) e-commerce.
The strategy received a boost during the pandemic lockdowns, with SMBs and healthcare companies scrambling to establish e-commerce capability. As a result, these new customers are now firmly part of UPS' universe.
UPS has significantly improved its profit margin and free-cash-flow generation in recent years. In addition, initiatives like its digital access program (DAP) for SMBs have helped its customers reduce the complexity of e-commerce shipping while receiving discounts for high-volume shippers.
Meanwhile, UPS has demonstrated a willingness to forgo lower-margin deliveries, conceding them to Amazon -- "better, not bigger" in action. For reference, FedEx has closed contracts with Amazon, a sign that the package delivery giants are not under any significant threat from Amazon.
It's resulted in UPS expanding average revenue per piece, revenue growth, operating profit margin, and profits, even if volumes have declined. Clearly, the focus on more-profitable end markets is working.
New technology will bring margin expansion
Despite appearances, the package delivery business is high-tech, and UPS is increasingly using new technology to improve productivity. For example, its on-road integrated optimization and navigation (ORION) helps reduce miles driven and improve fuel efficiency. Network planning tools are generating significant cost savings by eliminating unnecessary container movements and cutting trailer loads.
Another example comes from UPS' rollout of smart packaging using RFID labeling. During the third-quarter earnings call, Tome said that the rate of mis-loads (packages put on wrong vehicles) had been reduced from the usual 1 in 400 to "1 in 800, moving to 1 in 1,000."
While this might appear to be a minor improvement, it's a huge productivity saving when replicated across UPS' daily network. The company plans to accelerate the use of smart packages and smart facilities "because of the benefits that we're seeing inside of our business," according to Tome. Moreover, the automation of scanning using RFID will cut the need for manual scanning.
A stock to buy for the next decade
There's no doubt that UPS and FedEx will face some challenges in 2023. A slowing economy usually means slowing growth in package delivery. Still, much of the bad news is already priced into the stock, and UPS' management continues to make underlying improvements to the business via its transformational strategy and IT investments. All told, UPS is well placed to generate strong returns for investors over the long term.
