This past spring, United Parcel Service, Inc. (NYSE:UPS) forecasted its first decline in annual revenue since 2009. This came after news of its earnings and revenue falling the first quarter from a year ago. Representatives at UPS have accounted for this downward forecast due to sagging consumer spending. As U.S. retail sales drop and consumer trends change, UPS expects to have fewer packages to deliver in the U.S. and in its international networks.
Then there is the threat of a looming strike. Its 350,000 unionized workers are represented by the Teamsters and still have negative feelings towards the 2018 contract, which many felt was forced onto them. The last time that UPS workers went on strike was two decades ago and it was crippling for the company. If UPS workers vote to strike, it would be the largest employer strike in US history.
When considering these current stories about United Parcel Service, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. While the stock price has been trending down since April, it’s important to consider that the company is still delivering more packages than it was five years ago. A UPS strike could drop the stock price further in the short term until it resolves. The world has grown reliant on receiving essential medicines, groceries, and furniture delivered onto their doorsteps. That should encourage those who are considering investing in UPS for the long term.
While current news stories, good or bad can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if UPS is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. UPS has a company rating score of 79.08 out of 100. In summary, UPS seems to have above average fundamentals.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
(Source: BTMA Stock Analyzer )
Fundamentals
To start, let’s look at the price per share. We see in the chart below that the price per share has been steadily rising over the last 10 years. The biggest jump we see is between 2020 and 2021, when the price increased $80. This sharp increase can likely be attributed to the COVID-19 pandemic. Consumers adjusted their behavior to ordering their everyday products instead of making trips to retail stores.
It seems to be expected that as the U.S. and other countries came out of their stay-at-home orders, these behaviors dipped a bit which is why we see only a small increase of $2 in 2022, to falling back to 2020 in this year. With that being said, the Compound Annual Growth Rate of the share price average has grown by 9.92% over the last 10 years.
(Source: BTMA Stock Analyzer – Price Per Share History)
Earnings
Earnings history shows us how the earnings have performed over the past ten years. We can see that earnings were somewhat stagnant for the majority of the 10 years until 2020. It had a few years where the diluted earnings per share dropped from the previous year.
However, the most significant drop occurred in 2020, which again shows us the cautionary story of the COVID-19 lockdowns and uncertainty in the overall economy. The following year, with consumers purchasing more products online, the earnings increased sharply and this in turn had a similar effect on its share price. Then we see a small drop in 2022, which coincides with the course-correction that would naturally take place as lockdowns were lifted. The demand for shipping products is a behavior that appears to be a permanent one, though without the threat of a looming pandemic.
We can expect some volatility this year as consumer spending overall is waning. However, UPS remains as a necessary delivery business for the foreseeable future, which should provide some feeling of stability for investors.
(Source: BTMA Stock Analyzer – EPS History)
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
From 2018 to 2020, the return on equity was on a downward spiral. The COVID-19 pandemic negatively impacted this metric in 2020 in a similar way to how it affected earnings. From that drop in 2020 of nearly 51%, the ROE shot up almost 152% in 2021. The ROE took another significant drop from 2021 to 2022. Overall, Return on Equity has decreased, but it is still at impressive levels. For return on equity (ROE), I look for a 5-year average of 16% or more. So, UPS easily meets my requirements.
(Source: BTMA Stock Analyzer – ROE History)
Let’s compare the ROE of this company to its common industries. The average ROE of 25 “Packaging & Container” companies is 19.75%.
The average ROE of 69 “Retail (Distributors)” companies is 27.37%.
Therefore, UPS’s 5-year average of 137%, and current ROE of 67% are far above average!
Return on Invested Capital
The return on invested capital provides us with a sense of how well UPS is using its capital to generate profits. Reviewing the ROIC shows us that UPS is up 41% from 2018 to 2022. There were drops in 2019 and 2020, then a sharp jump, before experiencing a course correct in 2022.
Overall, ROIC has increased over the 5-year period and has mostly maintained sufficient levels.
For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. Therefore, UPS is still well above this mark.
(Source: BTMA Stock Analyzer – Return on Invested Capital History)
Gross Margin Percent
The gross margin percent (GMP) has been growing fairly steadily over the past 5 years, which is a good sign. However, I typically look for companies with gross margin percent consistently above 30%. UPS hasn’t yet met this requirement and it indicates that the company or industry isn’t able to maintain healthy margins and/or competition might be preventing UPS from increasing their pricing or lowering their costs enough to overcome these tight margins.
(Source: BTMA Stock Analyzer – Gross Margin Percent History)
Financial Stability
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is 1.18. This tells us that the company owes more than it owns, which is the opposite of what we want to see.
UPS’s Current Ratio is 1.22, which is a good indicator and tells us that UPS has the liquidity to pay short-term liabilities.
UPS pays a dividend yield of 3.68%. That’s a solid yield for dividend investors.
(Source: BTMA Stock Analyzer – Misc. Fundamentals)
This analysis wouldn’t be complete without considering the value of the company vs. share price.
Value Vs. Price
The company’s Price-Earnings Ratio of 14.4 indicates that UPS might be selling at a low price when comparing UPS’s P/E Ratio to a long-term market average P/E Ratio of 15.
The 10-year and 5-year average P/E Ratio of UPS has typically been 26.4 and 22.2, respectively. This indicates that UPS could be currently trading at a low price when compared to its average historical P/E Ratio range.
(Source: BTMA Stock Analyzer – Stock Value)
The Estimated Value of the Stock is $244.69, versus the current stock price of $171.50. This indicates that UPS is currently selling at a bargain price.
For more detailed valuation purposes, I will be using a conservative diluted EPS ttm of 12.36. I’ve used various past averages of growth rates and P/E Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
(Source: BTMA Wealth Builders Club )
According to the valuation analysis based on forward growth, UPS is slightly overpriced.
In my opinion, it’s more important to focus on the forward growth valuation of UPS because negative earnings growth of around -11% to -23% is being forecast.
In addition, the pending strike could push earnings down much further.
In summary, this analysis shows an average valuation range of around $151 to $164 per share versus its current price of about $173, this would indicate that UPS is overpriced.
Summarizing the Fundamentals
According to the facts, United Parcel Service could improve its long-term debt levels. However, it is healthy in the short-term sense of having enough cash to cover current liabilities.
Past 10 years earnings have been somewhat stagnant and unimpressive until the COVID surge boosted earnings. But now, this surge is settling, and earnings are sinking back to reality.
Fundamental indicators such as the ROE and ROIC are at acceptable levels. Whereas the Gross Margin Percent falls short of my requirements.
Some valuation methods estimate that UPS could be selling at a bargain price, and this would be true if UPS were able to maintain its COVID earnings. But since earnings are falling after COVID, forecasts are more pessimistic.
Future earnings forecasts estimate a pullback of -11% to 23%. Therefore, my more conservative detailed valuation analysis estimates that UPS is currently slightly overpriced.
UPS vs. the S&P 500
Now, let’s see how UPS compares versus the US stock market benchmark S&P 500 over the past 10 years. The chart below compares UPS to the Vanguard 500 Index Fund. We can see from the graph that UPS underperformed against the S&P for the majority of the past 10 years. Therefore, it seems that for most situations, investing in the S&P 500 would offer more diversity, less risk, and better returns than investing individually in UPS.
Forward-Looking Conclusion
Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 3.08%.
In addition, the average one-year price target for this stock is at $189.26, which is about a 9% increase in a year.
The Expected Annual Compounding Rate of Return is 13.69%
Does UPS Pass My Checklist?
- Company Rating 70+ out of 100? YES (79.08)
- Share Price Compound Annual Growth Rate > 12%? NO (9.92%)
- Earnings history mostly increasing? NO
- ROE (5-year average 16% or greater)? YES (40%)
- ROIC (5-year average 16% or greater)? YES (22%)
- Gross Margin % (5-year average > 30%)? NO (19%)
- Debt-to-Equity (less than 1)? NO
- Current Ratio (greater than 1)? YES
- Outperformed S&P 500 during most of the past 10 years? NO
- Do I think this company will continue to successfully sell their same main product/service for the next 10 years? YES
UPS scored 5/10 or 50%. Therefore, there are probably better investment opportunities to choose from.
Is UPS currently selling at a bargain price?
- Price Earnings less than 16? YES (14)
- Is UPS’s Value greater than Current Stock Price? NO (Value $151 to $164 < $173 Stock Price)
For me, the choice is certain. I will be passing on UPS at this time. The company needs fundamental improvements in earnings, gross margins, and debt-to-equity.
The current turmoil from the economic pressures and potential strike may cause UPS to have a further decrease in earnings performance and stock price. As a result, forecasts predict negative earnings growth over the next year.
The company consistently underperforms the more diversified S&P 500 benchmark and my detailed valuation analysis estimates that UPS is slightly overpriced.
These concerns persuade me to look for safer investments, which offer better return potential.
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