Big Brown Bounces Back

Almost two years have passed since Cramer’s been willing to recommend United Parcel Service. The stock is down 19% since then. But the soaring gas prices that hurt the stock so much might finally be returning to earth, he said, and that makes UPS a buy.

What makes Cramer so sure that oil prices should continue to come down? The price per barrel barely budged on news of Nigerian pipeline attacks and concerns over Iran’s nuclear program. In the not-so-distant past, the cost of oil would have moved much higher than $1 after events such as these.

It’s hard to imagine a company more exposed to fuel costs than UPS

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[UPS  Loading...      ()   ], Cramer said. The company saw a 67% increase in expenses for its most recent quarter. That puts a boa constrictor’s grip on margins. The trend by customers away from the more expensive next-day air services to the cheaper ground shipping hasn’t helped either.

But UPS might finally have bottomed. A heavily reduced 2008 earnings guidance announcement last Tuesday, July 22, actually sent the stock up about 4%. Wall Street, it seems, was expecting much worse. In a situation like this – when a stock trades up on bad news – that usually means that stock is headed higher, Cramer said.

And why shouldn’t UPS go higher? If prices at the pump drop to $3.50 as Cramer predicts they will, profits should increase. Plus, there’s a two-month lag on the fuel surcharge the company charges its customers. So the earnings should get a nice bump from that as well, as UPS pays below $4 but charges as if prices were still north of that figure.

There are other reasons to like the stock, too, though. UPS put into effect a hiring freeze to keep itself profitable. A recent deal with the Teamsters could save UPS $640 million over five years. And a 10-year agreement with rival DHL will put UPS in charge of that company’s U.S. shipments and those between the U.S., Canada and Mexico, possibly bringing in $1 billion a year in revenue.

Then there are the little things Cramer loves so much: a 2.9% dividend yield and $7,5 billion left in the stock buyback program. That’s 12% of UPS’s market cap.

One last thing. UPS actually has a terrific supply-chain business that grew profits at 51% in its most recent quarter. Basically, this is an outsourcing service for clients who want their supply chains run more efficiently, and the business is on fire.

“I think UPS is the ultimate play if gas prices continue to go lower,” Cramer said. But there’s so much more than just that.

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