Automation Investments Will Streamline Operations And Improve Service Reliability In US Logistics

Key Takeaways

• Strategic shifts to focus on higher-yielding volume and invest in automation aim to improve operational efficiency and revenue quality.
  
• Reduced reliance on USPS and targeting SMBs, healthcare, and B2B sectors are expected to drive growth and enhance margins.
  
• Dependence on Amazon and USPS changes pose significant revenue risks, while labor negotiation issues threaten to strain future margins and earnings.

Catalysts

A package delivery and logistics provider, offers transportation and delivery services.

• UPS is implementing significant changes to its U.S. business to address challenges such as market dynamics, reliance on a major customer, and changes in USPS operations. These actions are aimed at enhancing revenue quality by focusing on high-yielding volume, ultimately expected to increase operating margins.
  
• The transition from using the USPS for last-mile delivery to in-sourcing 100% of the SurePost product is intended to improve service reliability and maintain financial performance, which should positively impact revenue and potentially reduce costs associated with service quality issues.
  
• UPS's Efficiency Reimagined initiative aims to streamline processes and drive approximately $1 billion in savings, thereby optimizing operational costs and ultimately expected to enhance net margins and profitability.
  
• By reconfiguring its network in response to a reduction in volume from their largest customer, UPS plans to focus more on small and medium-sized businesses (SMBs), healthcare, and B2B segments—all positioned for stronger revenue growth due to targeted strategies and higher revenue per piece potential.
  
• UPS is accelerating its investment in the Network of the Future, including increased automation across facilities, which is anticipated to enhance efficiency, reduce operational costs, and potentially increase earnings as these initiatives take full effect.

United Parcel Service Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Parcel Service's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $7.7 billion (and earnings per share of $9.36) by about March 2028, up from $5.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $6.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 17.4x today. This future PE is lower than the current PE for the US Logistics industry at 20.4x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

United Parcel Service Future Earnings Per Share Growth

Risks

• UPS faces challenges related to the slow growth dynamics of the U.S. small package market, which could affect overall revenue growth.
  
• The company’s reliance on its largest customer, Amazon, is a risk, as UPS plans to reduce Amazon-related volume by more than 50% by 2026, potentially impacting near-term revenue.
  
• There are potential risks associated with UPS's previous reliance on USPS for the SurePost product, and transitioning to in-sourcing could affect service reliability and financial performance.
  
• Future financial results may be impacted by the unexpected changes in the USPS operating model, which poses a service risk for the company's in-sourced SurePost volume.
  
• UPS’s past labor negotiations with the Teamsters caused disruptions in volume and earnings, which could potentially strain future margins and earnings if similar issues arise.

Valuation

• The analysts have a consensus price target of $132.371 for United Parcel Service based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $179.0, and the most bearish reporting a price target of just $82.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $94.8 billion, earnings will come to $7.7 billion, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $118.86, the analyst price target of $132.37 is 10.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.