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UPS Strong on E-commerce, Payouts & Buybacks, Bears High Costs

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United Parcel Service (UPS - Free Report) is being aided by the strong e-commerce environment, despite economies reopening. Moreover, efforts to reward its shareholders through dividends and buybacks underline its financial strength. However, high operating expenses and supply-chain woes represent major headwinds. Currently, UPS carries a Zacks Rank #3 (Hold).

We are encouraged by UPS' solid free cash flow. In 2019, UPS generated adjusted free cash flow in excess of $4.1 billion.  Even in the coronavirus-hit scenario, UPS generated an impressive free cash flow of $5.1 billion in 2020. In 2021, the amount more than doubled to $10.9 billion. In first-quarter 2022, free cash flow increased 5.5% to $3.9 billion. The metric is expected to be around $9 billion in 2022.

Robust free cash-flow generation by UPS is a major positive and leads to an uptick in its shareholder-friendly activities. Notably, UPS paid out dividends worth $3,437 million in 2021, up 1.9% year over year. In 2021, UPS repurchased shares worth $500 million, up 130% year over year. UPS aims to reward its shareholders with $7.2 billion in 2022 through dividends ($5.2 billion) and share buybacks ($2 billion).

The agreement inked with ESW in March 2022 is an added positive. The deal aims to capitalize on the growing popularity of cross-border e-commerce. Despite economies reopening, the thirst for online shopping is rampant among consumers. E-commerce growth is likely to bolster UPS’ top line. We are also impressed with UPS' environmentally-friendly approach.

However, the increase in operating expenses is concerning and denting bottom-line growth. For example, operating costs escalated 9.7% in 2021. Due to the 51.2% increase in fuel expenses, operating costs increased 4.9% in first-quarter 2022. Due to high fuel costs, operating expenses are likely to shoot up in second-quarter 2022 as well. 

Also, supply chain-led challenges may hurt UPS' performance in the coming days. Apart from supply-chain issues, headwinds like COVID-led bottlenecks, inflationary pressures and labor shortages are weighing on the stock.

Stocks to Consider

Some better-ranked stocks in the broader Zacks Transportation sector are Ryder System (R - Free Report) , C.H. Robinson Worldwide (CHRW - Free Report) and GATX Corporation (GATX - Free Report) .

Ryder has a trailing-four quarter surprise of 48.2%, on average, with its earnings having surpassed the Zacks Consensus Estimate in all the last four quarters.

R is benefiting from improving economic and freight conditions in the United States. Revenues in all segments grew (on higher rental revenues, new business and favorable pricing) in first-quarter 2022. R currently sports a Zacks Rank #1 (Strong Buy).  You can see  the complete list of today’s Zacks #1 Rank stocks here.

The long-term (three-to-five years) expected earnings per share growth rate for C.H. Robinson is pegged at 9%. Improving freight market conditions are aiding CHRW. In first-quarter 2022, the top line improved 41.8% owing to favorable truckload pricing for customers and handsome profits in ocean freight.

Driven by the positives, the stock has rallied 12.2% in the past year.  CHRW currently sports a Zacks Rank of 1.

GATX has a trailing-four quarter surprise of 40.1%, on average, with its earnings having surpassed the Zacks Consensus Estimate in all the last four quarters. The gradual improvement in the North American railcar leasing market is a huge positive for GATX.

Driven by the upsides, the stock has risen 6.7% in the past year.  GATX currently has a Zacks Rank of 1.