UPS Stock Up 20% in October – Time to Buy UPS Stock?

The price of UPS stock has been steadily going up in October while its monthly performance surged to 20% yesterday following a pronounced single-day uptick that came after the company released its financial results covering the third quarter of 2021.

During the three months ended on 30 September, the company reported total revenues of $23.2 billion resulting in a 9.2% year-on-year increase while exceeding the Street’s estimates for the quarter by nearly 3%.

Higher international revenues were primarily responsible for this uptick as they rose to $4.72 billion for a 15.5% year-on-year increase while US revenues went up a milder 7.4%.

Price increases offset lower shipping volumes across the board with average revenues per piece experiencing a 13% year-on-year jump at $12.5.

The firm’s adjusted operating profit experienced a 23.4% increase compared to the same quarter a year ago at $2.97 billion while UPS’s adjusted operating margin rose 150 basis points on a year-on-year basis to 12.8%.

Finally, adjusted diluted earnings per share landed at $2.71 resulting in an 18.9% jump compared to the same period a year ago. This figure was 16 cents higher than Wall Street’s consensus estimate for the period as compiled by Capital IQ.

Can these exceptionally good results lead to the continuation of the current uptrend for UPS stock? I’ll attempt to answer that question in this article upon assessing the firm’s price action and fundamentals.

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UPS Stock – Technical Analysis

A closer look at the latest price action for UPS stock shows that yesterday’s jump pushed the price to fresh all-time highs during intraday stock trading action to then settle lower for a 7% gain.

These positive quarterly results led to a liquidity crunch that resulted in a bullish price gap. This gap can now act as support for further price increases as long as bulls manage to break the $220 resistance – the stock’s prior all-time high.

Trading volumes were quite elevated as they exceeded the 10-day average by two times. However, momentum oscillators are pointing to a short-term oversold situation as the Relative Strength Index (RSI) has climbed to 84 – its highest reading since late April this year.

Back then, the price experienced a similar gap-up after the firm released its financial results covering the fourth quarter of 2020. The stock went on to jump another 11% after the initial 10% single-day post-earnings spike.

All things considered, if the price breaks above the $220 threshold, chances are that UPS stock could surge near the $250 level for a 15% upside potential.

UPS Stock – Fundamental Analysis

For the twelve months ended on December 2020, UPS reported adjusted earnings per share of $8.23 on adjusted operating margins of 10.3%. Therefore, we could safely assume that earnings per share for the upcoming 2021 fiscal year will experience a significant increase as a result of this higher expected adjusted operating margin of 13% for the year.

According to analysts’ estimates, this improvement in the company’s bottom-line profitability should result in a 37% jump in its adjusted earnings per share for 2021. At the moment, the forward P/E ratio is standing at 18.9x.

Meanwhile, the firm is expected to deliver free cash flows of $10.5 billion during 2021 that would result in a forward price-to-FCF valuation of 18 for UPS stock.

Back in 2016, adjusted earnings per share landed at $5.75 for UPS on a fully diluted basis. Using this forecasted figure of $11.28 for 2021, this would result in a compounded annual growth rate of 14.4% for the company’s earnings.

Considering this track record, the current valuation seems fair. However, since most of the growth is coming from price rather than volume increases in the business amid the ongoing supply-chain crisis, it remains to be seen if the business will be able to deliver positive results in the future when conditions normalize as such a scenario could result in tougher comps and lower valuation multiples for the company.

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