Cramer's Investing Club: Strong UPS earnings show CEO's better-not-bigger strategy is working

Published Tue, Feb 1 202212:24 PM ESTUpdated Tue, Feb 1 20226:50 PM EST

Charitable Trust holding United Parcel Service (UPS) released very strong fourth-quarter results before the opening bell Tuesday and shares soared 14%. In addition to better-than-expected consolidated revenue, operating profit and earnings per-share, the delivery giant outpaced sales and operating profit expectations in every segment. The strong results were met with equally strong full-year 2022 guidance and a dividend boost that was more than investors had expected. Bottom line The solid Q4 performance and strong forward guidance speaks to the strong execution of CEO Carol Tomé and the UPS team on the company's " better not bigger " framework. Additionally, the accelerated adoption of online shopping we saw as a result of the Covid pandemic is clearly more than a one-time blip in demand, and UPS is off to a very strong start to the new year. Despite the strong results, we are maintaining our 2 rating on UPS as we don't want to chase this move higher. Our price target is currently under review. Consolidated results On the top line, sales of $27.77 billion (+11.5% YoY) outpaced the $26.96 expected, while adjusted diluted earnings of $3.59 per share (+35% YoY) crushed the $3.08 estimate. Furthermore, adjusted operating profit of $3.952 billion (+37.7% YoY), the highest in company history, came in well ahead of the $3.43 billion the street was looking for thanks to 270bps expansion in operating margin to 14.7%, well ahead of the 12.7% margin the street had expected. On the call, Tome spoke to some of the progress they are making on key initiatives. On the small & medium sized business (SMB) front, Tome called out 18% average daily volume growth in 2021. This growth resulted in SMB representing 26.8% of total US volumes in 2021 and puts UPS on track to realize its 2023 target of SMB representing over 30% of US volumes. The company's healthcare portfolio, which includes a global footprint of healthcare facilities and cold chain solutions achieved over $8 billion of sales in 2021 and puts UPS on track to achieve its $10 billion 2023 revenue target. As for digital engagement, Tome noted that UPS actually generates over $9billion in gross revenue from its global website and thanks to a 2021 redesign, monthly page views surged from 10,000 in January 2021 to 600,000 by December. Taking a look at some other full year consolidated results, management called out a 114% increase in free cash flow to $10.9 billion — which when compared to full year net income of $12.89 billion represents a very healthy 85% free cash flow conversion ratio; full year operating cash flow of $15.01 billion exceeded net income. Additionally, management strengthened the balance sheet by paying of $2.55 billion of long-term debt and reducing its pension liability by $7.9 billion. Combined, these actions helped reduce leverage (calculated as debt-to-EBITDA) from 3.6x as of the end of 2020 to 1.9x at the end of 2021. Segment results In U.S. Domestic , revenue of $17.697 billion (12.5% YoY) outpaced the $17.669 billion estimate with operating profit of $2.103 billion outpacing the $1.803 billion estimate. Next day air sales increased 17.7% YoY as revenue per piece increased 13.5% YoY and average daily package volume increased 2.0% YoY. Deferred sales increased 9.9% YoY as revenue per piece increased 8.0% YoY and average daily package volume increased 0.2% YoY. Ground sales increased 11.7% YoY as revenue per piece increased 10.0% YoY and average daily package volume decreased 0.1% YoY. International revenue of $5.397 billion (13.1% YoY) outpaced the $5.125 billion estimate with operating profit of $1.326 billion outpacing the $1.218 billion estimate. Domestic sales contracted 0.3% YoY as revenue per piece increased 2.7% YoY and average daily package volume decreased 4.5% YoY. Export sales increased 16.1% YoY as revenue per piece increased 20.5% YoY and average daily package volume decreased 5.2% YoY. Cargo and other sales increase 27.3% YoY. Supply Chain Solutions record fourth quarter revenue of $4.677 billion (+6.7% YoY) outpaced the $4.0 billion estimate with operating profit of $462 million outpacing the $430 million estimate. Forwarding sales increased 37.9% YoY Logistics sales increase 10.9% YoY. As for the dividend, UPS boosted the quarterly payout an incredible 49% — the largest quarterly increase in company history — to $1.52 per share. That's materially better than the $1.45 per share quarterly payout the Street had expected and annualizes to a dividend yield of ~2.67% (based on a $228 share price). Guidance Looking ahead, management expects to deliver on their consolidated revenue and operating margin targets a full year ahead of expectations. For FY2022, management forecasts revenue of ~$102 billion with an operating margin of ~13.7%. That's better than the $110.15 billion topline and 13.3% operating margin the Street was anticipating. Return on invested capital is also expected to be above 30%. Segment guidance was as follows: U.S. Domestic: revenue growth of 5.5% (implying sales of $63.634 billion) vs. $64.44 billion expected, with revenue per piece growing faster than volume International: revenue growth of 7.7% (implying sales of $21.045 billion) vs. $20.127 billion expected, with volume growing slightly faster than revenue Supply Chain Solutions: revenue of "around $17 billion," well ahead of the $16.06 billion estimate FY2022 Capex is expected to come in at $5.5 billion, slightly above the $5.0 billion expected, however, perfectly acceptable as 60% of capital spending will go to growth projects with the remainder allocated to maintenance. As noted on the call, "these investments will continue to improve overall network efficiency and move [UPS] further down the path to achieving [its] 2050 carbon-neutral goal." Finally, UPS expects to repurchase at least $1billion of shares in FY2022. (Jim Cramer's Charitable Trust is long UPS. See here for a full list of the stocks.) 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A United Parcel Service driver unloads package in the Lincoln Park neighborhood of Chicago, Illinois, U.S., on Monday, Nov. 30, 2020.

Christopher Dilts | Bloomberg | Getty Images

Charitable Trust holding United Parcel Service (UPS) released very strong fourth-quarter results before the opening bell Tuesday and shares soared 14%.