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United Parcel Service was a high-flying stock during the coronavirus pandemic.
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Following the end of the pandemic, UPS shares fell sharply amid a corporate makeover.
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That makeover is already showing early results for those who can handle a turnaround investment.
United Parcel Service (NYSE: UPS), commonly known as UPS, operates one of the world’s dominant package delivery services. It is a vital cog in modern society, as e-commerce continues to grow. Add a huge 6% dividend yield, and dividend investors might be tempted to buy the stock while it languishes below $110 per share. Before you jump aboard, you’ll want to understand a few things.
Delivering packages sounds simple, but it is actually a capital-intensive, logistically complex effort. UPS owns a large collection of retail stores, sorting and distribution facilities, a massive fleet of local delivery trucks, and long-haul assets, like tractor-trailers and airplanes. And it has to have the technology to track every single package moving through its extensive system.
It would be hard, if not impossible, to replace UPS. In fact, even after years of building its own delivery network, e-commerce giant Amazon (NASDAQ: AMZN) still uses UPS. However, Amazon is also a key part of UPS’s current business revamp, with the story dating back to the coronavirus pandemic in 2020.
During the pandemic, shopping online was the preferred way to buy things because people were stuck at home, socially distancing themselves. Demand for package delivery services skyrocketed, and UPS’s stock rose dramatically. When the world reopened, demand normalized, and UPS’s stock plunged. It was about this time that this industrial company decided it needed to overhaul its business. Amazon is important here because it is a large-volume customer, but that volume has very low profit margins.
UPS decided it needed to streamline its operations and focus its business on its most profitable customers. This effort included proactively reducing its exposure to Amazon. The business turnaround also involved capital investments in new technology and the closure of less efficient facilities. Essentially, it was spending more money and bringing in less revenue. Wall Street has been avoiding the stock, which is still about 53% below its 2022 high.
It is entirely reasonable that investors were concerned about the income statement trends emerging at UPS. However, turnarounds often look ugly at first since they usually require upfront spending that doesn’t provide a return until some time down the road. UPS is starting to see early improvement, which is very encouraging.
