What’s Next For UPS Stock After A Dismal Q2?

UPS (NYSE: UPS) recently reported its Q2 results, with revenues and earnings missing the street estimates. The company reported revenue of $21.8 billion and adjusted earnings of $1.79 per share, compared to the consensus estimates of $22.2 billion and $1.99, respectively. 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 15% from levels of $150 in early January 2021 to around $125 now, vs. an increase of about 45% for the S&P 500 over this period. However, the decrease in UPS stock has been far from consistent. Returns for the stock were 30% in 2021, -16% in 2022, and -6% 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 RTX, 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 some room for growth. We estimate UPS’s valuation to be $151 per share, reflecting an upside of over 15% from its current levels of $127. Our forecast is based on a 19x P/E multiple for UPS and expected earnings of $7.96 on a per-share and adjusted basis for the full year 2024. The 19x figure aligns with the stock’s average P/E ratio over the last three years.

UPS’s revenue of $21.8 billion in Q2 was down 1% y-o-y, amid a weak freight demand environment. Supply Chain Solutions segment sales were up 2.6%, while the U.S. Domestic Package sales were down 1.9% and the International sales declined 1%. The company saw a rebound in domestic volumes, with the U.S. Domestic average daily package volume up 0.7%. However, international volume was down 2.9% y-o-y. The average revenue per piece for the U.S. Domestic packages was down 2.6% and down 1.7% for international packages. The consolidated adjusted operating margin stood at 9.5%. Looking at the bottom line, adjusted EPS plunged 29.5% y-o-y to $1.79 in Q2 2024. UPS lowered its 2024 revenue outlook to $93 billion, versus its prior-guidance of $92 billion to $94.5 billion. Furthermore, it lowered its adjusted operating profit margin outlook from 10.3% at the mid-point of the earlier provided range to 9.4% now.

Overall, UPS delivered a downbeat Q2 with a downward revision to its full-year outlook and this did not sit well with the investors, evident from a 12% fall in its stock in the last five days. That said, from a valuation perspective, we think after its recent decline, UPS stock appears to have some room for growth. Also, a rebound in the U.S. volumes is a positive takeaway from the company’s latest results.

[1] Returns as of 7/26/2024
[2] Cumulative total returns since the end of 2016

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