United Parcel Service (NYSE:UPS) has multiple, strong, positive catalysts which makes UPS stock a good investment for conservative, low-risk, long-term investors.
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Among the company’s drivers are strong e-commerce initiatives by a wide array of companies, the work-from-home trend, and Amazon’s (NASDAQ:AMZN) strength.
In recent years, many companies besides Amazon have launched huge e-commerce initiatives. Large brick-and-mortar retailers like Target (NYSE:TGT), Walmart (NYSE:WMT), and Home Depot (NYSE:HD) have spent tremendous amounts of money to create strong e-commerce businesses. Using the services of Shopify (NYSE:SHOP), small and medium retailers have gotten into the fray, too.
Of course, during the pandemic, e-commerce has become much more pervasive. Since many brick-and-mortar stores were shut, millions of consumers who rarely or never used e-commerce have wholeheartedly embraced the phenomenon.
In fact, last quarter, the number of packages shipped by FedEx’s ground unit jumped 25% year-over-year.
A Closer Look at UPS Stock
For FedEx and UPS, this proliferation of e-commerce is a huge, positive catalyst. Not only is the demand for their shipping services jumping, but the spread of e-commerce will greatly boost the prices that they can charge for those services.
That’s because, when Amazon controlled a huge amount of e-commerce market share, the tech giant could, to a large extent, keep the shippers from increasing the prices it charged for shipping products to consumers.
I believe that Amazon successfully used the launch of its own shipping system and its utilization of the United States Postal Service to keep the prices charged by FedEx and UPS down. Specifically, UPS and FedEx knew that if they raised their prices more, Amazon could find other ways of shipping its products, and the shippers’ e-commerce business would tumble.
But with so many retailers relying more and more on e-commerce, the shippers are not nearly as dependent on Amazon as they used to be, enabling them to raise their e-commerce-shipping prices. Actually, FedEx has become so independent of Amazon that it was able to part ways with the e-commerce giant last year.
This phenomenon likely explains why “the margin on [FedEx’s] ground delivery business was a lot better [last quarter] than many had feared it would be.”
Moreover, despite increased costs related to the pandemic, that metric hit its highest level in three quarters. And UPS is likely to duplicate that feat when it reports its Q2 results on July 30.
The Work-From-Home Trend
Sometimes people who work together have to be sent the same products that just can’t be delivered over the internet.
For example, the head designer and the CEO of an electric-car startup will likely want to check the miniature prototype of a vehicle that the company is developing. If both of them are working from home, either two separate prototypes will have to be sent out or one of the two executives will have to send the same one to the other.
Either way, UPS will make double the revenue and profit from the situation. It isn’t as if as both executives were still working in the office and could look at the same prototype.
UPS still carries out deliveries for Amazon, so the company has benefited from the e-commerce giant’s tremendous growth and will continue to do so.
Moreover, as a result of demand increases, Amazon has abandoned its efforts to compete with UPS and FedEx through its own third-party shipping service. That’s certainly very good news for both companies, and it should greatly improve sentiment towards UPS stock and FedEx stock.
The Bottom Line on UPS Stock
UPS still faces significant hurdles caused by the pandemic. In addition to higher costs, FedEx noted that its international air shipments had plunged sharply as a result of the coronavirus.
But over the longer term, following the introduction of a vaccine, both of those negative catalysts should ease. Meanwhile, with many more consumers having become used to utilizing e-commerce, more retailers intensifying their use of e-commerce, and more people working from home, the new, positive catalysts should largely stay intact.
As of this writing, Larry Ramer did not own shares of any of the aforementioned stocks. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been Roku, oil stocks and Snap. Larry began writing columns for InvestorPlace in 2015. You can reach him on StockTwits at @larryramer.
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