United Parcel Service stock has had an incredible run over the past 15 months. Logistics expertise proved to be incredibly valuable during pandemic. As a result, sales and earnings have exploded at the century-old delivery giant. The company will make a presentation Wednesday to discuss its future. Given the changes in the economy, investors should like what they hear.
UPS (ticker: UPS) stock is up about 26% year to date, better than comparable gains of the S&P 500 and Dow Jones Industrial Average. What's more, shares have been rising in chucks as the company has consistently blown away Wall Street earnings expectations. UPS stock jumped 14% after the shipper beat second-quarter 2020 earnings expectations by roughly 100%. Shares jumped another 10% after the company blew away first-quarter 2021 earnings expectations by roughly 60%.
Adding it all up, UPS stock is up more than 110% from a 52-week intraday low, and is sitting just below a record high.
UPS turned out to be perfectly positioned for pandemic. Covid-19 led to an explosion in online shopping. It also led to a reduction in the number of planes flying around the world delivering freight. That pushed up pricing for UPS. With pricing and volume both rising, Wall Street has had trouble keeping up with the improvement in the company's business.
A year ago, about 45% of the analysts covering UPS stock rated it at Buy, making it less popular than others. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. Today, about 57% of analysts covering UPS stock rate it at Buy.
One of the analysts who was bullish in the middle of 2020 is Deutsche Bank's Amit Mehrotra . He upgraded UPS stock in March 2020, noting that "periods of difficulty and challenge can create dislocations and long-term opportunity." Mehrotra added that "we view UPS as one of the most-compelling ideas in our coverage and forecast significant upside as focus moves from transitory headwinds to structural earnings power."
Mehrotra was essentially right. But that was then and this is now. He is still bullish on the stock, though, believing the company will lay out a bullish scenario for "structural earnings power." In short, there is no going back to the old business fundamentals.
What Mehrotra is looking for in Wednesday's presentation is $15 a share in earnings power by 2024 with 100% free-cash-flow conversion. The 100% ratio means that there is no big investment cycle that requires diverting cash to new plants and equipment, making earnings and free cash flow essentially the same number.
Wall Street projects earnings per share of $13.41 for 2024, so $15 represents positive long-term upside.
UPS stock now trades for about 19 times estimated 2022 earnings. At $15 in 2024 earnings, UPS stock would be worth about $300 in the middle of 2023, which implies gains of about 20% a year on average for the next two years.
That's the bullish scenario. There are risks that investors will hear something they don't like Wednesday. The main risk is that investors are already too bullish. J.P. Morgan analyst Brian Ossenbeck surveyed his clients recently and wrote this past week that most clients expect a positive stock-price reaction to the UPS investor event. When everyone is positioned the same way, stocks tend to do the opposite.
Still, he remains "constructive" on the shipping industry but recommends investors look at UPS stock only after the event is done.
No matter which analyst opinion resonates with investors, UPS stock—for the long run—is worth owning today or, if not today, then Wednesday afternoon.
Ossenbeck rates shares at Hold and has a $224 price target. Mehrotra rates shares at Buy and has a $260 price target.
The UPS investor day starts at 9 a.m. eastern time and can be streamed here .