Will UPS Stock Recover To Its Pre-Inflation Shock High of $230?

UPS stock (NYSE: UPS) currently trades at $156 per share, 32% below the peak level of $232 seen in February 2022, and it seems appropriately priced, in our view. UPS stock was trading at around $182 in early June 2022, just before the Fed started increasing rates, and is now 15% below that level, compared to 38% gains for the S&P 500 during this period. This underperformance can primarily be attributed to a broader decline in parcel delivery volumes, amid a weak consumer spending environment amid higher inflation.

Looking at a slightly longer term, UPS stock has seen little change, moving slightly from levels of $170 in early January 2021 to around $155 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. Overall, the performance of UPS stock with respect to the index has been lackluster. 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 GE, CAT, and UNP, and even for the megacap 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 strong jump? From a valuation perspective, UPS stock looks fully priced. We estimate UPS’ Valuation to be $156 per share, aligning with the current market price. Our estimate is based on a little under 19x forward earnings estimate of $8.36 in 2024 for UPS, aligning with the stock’s average P/E ratio seen over the last three years.

Our detailed analysis of UPS’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how UPS stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

UPS and S&P 500 Performance During 2007-08 Crisis

UPS stock declined from $76 in September 2007 (pre-crisis peak) to $41 in March 2009 (as the markets bottomed out). It recovered after the 2008 crisis to levels of around $57 in early 2010, rising over 39% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 (pre-crisis peak) to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

UPS’ Fundamentals Over Recent Years

UPS’ revenue decreased to $91 billion in 2023, compared to $97 billion in 2021, due to an 11% fall in the U.S. and a 14% decline in international average package volume. However, average yields have risen over this period. UPS’ operating margin decreased from 13.2% in 2021 to 10% in 2023. 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. Lower revenues and a contraction in operating margin resulted in reported earnings per share falling to $7.84 from $14.75 over the same period.

Does UPS Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

UPS’ total debt hovered around $22 billion in recent years, while its cash decreased from $12.4 billion in 2021 to $8.2 billion in 2023. The company also garnered $10.2 billion in cash flows from operations in the last twelve months. Given its solid cash cushion, UPS is in a comfortable position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment and rate cuts are likely in the cards, we believe UPS stock has the potential for some gains once fears of a recession are allayed. But for now, we think it’s fully priced. There are near-term concerns for UPS stock. Given the higher inflation, the overall consumer spending environment is weak. The company’s outlook points toward continued pressure on operating margins. Overall, we think investors will likely be better off waiting for a dip to enter UPS.

While UPS stock can see higher levels, it is helpful to see how UPS’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 3/25/2024
[2] Cumulative total returns since the end of 2016

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