Why UPS shares could deliver for your portfolio
What's been lifting stock prices this year? Thanks primarily go to improving market fundamentals, including still-low interest rates, minimal inflation, declining unemployment, rising GDP, and strengthening global economic growth. Added to these positives is the perception on Wall Street that tax cuts are coming.
However, that's also one of the potential problems that could upset this market: What if the Trump administration fails to make any headway on its version of tax reform? It wouldn't be the first plank of the president's platform to go nowhere in Congress. So for investors, owning shares of companies that are not only fundamentally sound but also "politics-proof" would help protect their portfolios.
One such company that has attracted many investors of late is United Parcel Service (UPS), the world's largest express and package delivery company, which is considered a major play on continued U.S. economic growth. In particular, it's likely to be a big beneficiary of the huge rise in e-commerce.
"We think the level of expected growth in online sales is likely to drive strong revenue and earnings-per-share growth for UPS over the next few years, even as an improving global economy is likely to drive more shipments overall," said Jim Corridore, equity analyst at CFRA Research, which in late August named UPS as its "Focus Stock of the Week."
Corridore, who rates the stock as a "strong buy," noted that as the leading facilitator of e-commerce, UPS should benefit from online sales on both the delivery side and through the logistics services it provides to retailers and others.
During the important back-to-school season now in progress, "we expect UPS to be a major beneficiary of growing online sales of school supplies, back-to-school clothes and other related items," said Corridore. Sales during this particular period are enormous. Back-to-school spending is expected to jump 8 percent this year, to $29.5 billion, while combined back-to-school and college spending is likely to climb 10 percent, to $83.6 billion, according to the National Retail Federation (NRF).
UPS's stock had been on a steady climb in 2016, rising to a high of $120 a share from a low of $87. But earnings suffered as rising costs for new infrastructure to handle growing volumes hampered operating margins. For 2016, UPS posted earnings of $3.87 a share, down from 2015's $5.35.
But for 2017, Corridore expects earnings of $6.07 a share as he projects revenues to rise 5.5 percent and a further 5 percent in 2018. He sees growth in U.S. and international revenue improving as higher volumes offset lower pricing. He projects the stock, currently trading at $114 a share, rising to $151 in 12 months. Corridore sees much of the growth coming from market share gains rather than strong overall shipping demand.
Online holiday sales reached a record last year, and this year Corridore also expects strong growth, providing another catalyst for the stock.
According to the NRF, holiday sales in 2016 climbed 4 percent, to $659 billion, while online sales grew a more robust 13 percent, to $123 billion. Corridore expects the latter to keep growing faster than overall retail sales both during the holiday and other periods.
UPS "is a strong generator of cash, and we favor its historical use of funds to pay dividends and repurchase stocks," noted Corridore. The stock has a dividend yield of nearly 3 percent, which has attracted hordes of investors who favor stocks that pay high dividends.
In sum, with online sales in the U.S. definitely on a strong uptrend and the economy destined to grow faster, UPS appears to be in the best place as the leader in the rapidly growing package delivery industry. No matter happens -- or doesn't happen -- in Washington.