Investor Alert

Aug. 15, 2019, 9:54 a.m. EDT

5 reasons why UPS will finally deliver outperformance for investors

The shipper’s stock has lagged behind the S&P 500 for several years, though that’s about to change fast

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By Michael Brush, MarketWatch

Bloomberg News
UPS is opening new hubs and faster sorting centers, and rolling out new services like delivery seven days a week starting in 2020, expanded hours, more pickup locations and more sophisticated package tracking for customers.

Amazon.com seems so good at most of what it does, the online retailer’s aggressive move into shipping has a lot of investors avoiding UPS.

They’re going to be sorry.

UPS /zigman2/quotes/201245396/composite UPS -6.99%  shares are poised to outperform other transport companies and probably the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.47%  for years to come. Here are five reasons why.

1. Amazon and UPS are best friends, for now

Sure, they might not be BFF. At some point Amazon /zigman2/quotes/210331248/composite AMZN -1.98%  could pull the plug on UPS. But they’re going to be BFFA, or best friends for awhile. That’s because Amazon started moving aggressively into next-day shipping earlier this year. And Amazon knows it needs all the help it can get.

“It does create a shock to the system,” Amazon CFO Brian Olsavsky acknowledged in the second-quarter conference call. “We expect we’ll be working through that for a number of quarters.” There’s added pressure because FedEx /zigman2/quotes/203047719/composite FDX -5.00% just bailed on Amazon as a partner in ground shipping. And the United States Post Office jacked up rates by over 10% last year — nails on the chalk board to a cost-obsessed guy like Jeff Bezos at Amazon.

Meanwhile, outside of Amazon, UPS has a lock on business since Amazon rivals like Walmart /zigman2/quotes/207374728/composite WMT +0.0070% are unlikely to turn to Amazon for shipping services.

“Given the immense addressable market in e-commerce, both Amazon and UPS can thrive. They both need each other to satisfy the insatiable demand,” says Todd Lowenstein, chief equity strategist at HighMark Capital Management, which own UPS stock.

This holiday season will be especially tricky, since it’ll be crunch time. There are six fewer days between Thanksgiving and Christmas this year, compared with last year.

2. Shoppers really like next-day delivery

Amazon launched free one-day shipping for Prime members in the second quarter, and customers love it. Amazon sales growth accelerated to 20% that quarter, up from 17% in the first quarter. CFO Olsavsky attributed a good bit of the growth to one-day shipping.

“One-day shipping lights up a whole separate usefulness for the Amazon site,” he said in the second-quarter conference call. “It strengthens the need to not have to go elsewhere to buy a product because you need it quickly. So I think it’s becomes a part of [customer] routine. At least that’s what we’re seeing in North America.”

UPS is obviously a beneficiary. It’s next-day air business surged 30% in the second quarter, the strongest growth in more than a decade.

3. Investments are just starting to pay off

The timing of Amazon’s next-day shipping launch could hardly be better for UPS investors. UPS stock has virtually gone nowhere since the start of 2015, in part because heavy investments in new hubs and better technology weighed on profits. The investment ramp was huge. Annual capital spending came in at $5 billion to $6 billion for the past few years, around three times the $2 billion during 2011 to 2015, says Lowenstein.

$ 195.19
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-14.87 -5.00%
Volume: 4.84M
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$79.54 billion
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$ 142.64
+0.01 +0.0070%
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