Should You Pick UPS Stock After Its 10% Fall Last Year?

UPS (NYSE: UPS) recently reported its Q4 results, with revenues missing but earnings marginally ahead of the street estimates. The company’s outlook for 2024 sales also fell short of expectations, and the stock is down 8% so far this year. Despite its recent fall, we think that UPS stock has little room for growth. The company reported revenue of $24.9 billion and adjusted earnings of $2.47 per share compared to the consensus estimates of $25.4 billion and $2.46, respectively. In this note, we discuss UPS’ stock performance, key takeaways from its recent results, and valuation.

UPS stock has seen a decline of 15% from levels of $170 in early January 2021 to around $145 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the decrease in UPS stock has been far from consistent. Returns for the stock were 27% in 2021, -19% in 2022, and -10% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that UPS underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the industrials sector, including CAT, UNP, and GE, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UPS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, UPS stock looks like it has little room for growth. We estimate UPS’s valuation to be $156 per share, reflecting an upside of just over 5% from its current levels of $147. Our forecast is based on an 18x P/E multiple for UPS and expected earnings of $8.36 on a per-share and adjusted basis for the full year 2024. The 19x figure aligns with the average value over the last three years.

UPS’s revenue of $24.9 billion in Q4 was down 8% y-o-y, and the company stated that challenging macroeconomic conditions weighed on the overall demand. The company’s operating margins have also been weighed down in the recent past, primarily due to the impact of the labor deal with the Teamsters Union that was ratified in August last year. The adjusted operating margin slid 290 bos to 11.2% in Q4. Lower revenues and margin contraction resulted in a 32% fall in the bottom line to $2.47 on an adjusted basis.  UPS expects its 2024 revenue to be in the range of $92 billion to $94.5 billion, falling short of the $95.6 billion consensus estimate.

The company’s management stated that 60% of the volume that had been diverted during the labor negotiations has been won back, and more of this loss will be mitigated over the coming months. However, the margin outlook of 10% to 10.6% in 2024 remains below the 10.9% seen in 2023. UPS also faces near-term challenges due to higher costs and an uncertain macroeconomic environment, which are likely to weigh on the overall top-and-bottom-line growth for a few quarters.

[1] Returns as of 2/8/2024
[2] Cumulative total returns since the end of 2016

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