What’s Next For UPS Stock After A 6% Fall This Year?

UPS (NYSE: UPS) recently reported its Q1 results, with revenues missing but earnings ahead of our estimates. The company reported revenue of $21.7 billion and adjusted earnings of $1.43 per share, compared to our estimates of $22 billion and $1.38, respectively. In this note, we discuss UPS’ stock performance, key takeaways from its recent results, and valuation. The company continues to face lower volume, while pricing also saw a modest decline. Although UPS posted an upbeat Q1 earnings, we think its stock has little room for growth from its current levels of around $150. In this note, we discuss UPS’ stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at its stock performance. UPS stock has seen a decline of 10% from levels of $170 in early January 2021 to around $150 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 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 recovery? From a valuation perspective, UPS stock looks like it has little room for growth. We estimate UPS’s valuation to be $163 per share, reflecting an upside of just around 10% from its current levels of $150. Our forecast is based on a 20x P/E multiple for UPS and expected earnings of $8.25 on a per-share and adjusted basis for the full year 2024. The 20x figure compares with the 19x average value over the last three years.

UPS’s revenue of $21.7 billion in Q1 was down 5% y-o-y, and the company stated that the soft demand environment weighed on the overall revenue growth. 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 300 bps to 18% in Q1. Lower revenues and margin contraction resulted in a 35% fall in the bottom line to $1.43 on an adjusted basis.  UPS continues to expect its 2024 revenue to be in the range of $92 billion to $94.5 billion, and it expects operating margin to improve to 10%-10.6%. We think any significant growth in UPS stock will come in the second half of the year when the company delivers on margin expansion.

[1] Returns as of 4/27/2024
[2] Cumulative total returns since the end of 2016

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