Is UPS Stock Overvalued?

Is UPS Stock Overvalued? There is no doubt 2020 will go down in history as one of the most difficult, volatile years this century. The pandemic has entire nations shutting down their economies in an attempt to mitigate the spread of COVID-19. Still, people continue to fall ill, and it is likely they will continue to do so until a reliable vaccine becomes available. 

Many economic experts have attempted to quantify the impact of the pandemic, but it is challenging to identify and assign value to every direct and indirect pandemic-related loss. That’s especially true, because some companies and their shareholders are realizing financial gains from the changes in consumer habits. 

Organizations like Zoom (ZM), Amazon (AMZN), and Netflix (NFLX) are thriving in the COVID-19 economy, because they have the exact products and services that people need to comply with stay-at-home orders.

UPS (United Parcel Service) is another big winner as demand for home delivery goes up. 

The increase in revenue has pushed up UPS’ stock price over the course of the year, but some investors aren’t impressed. They believe the rising share prices are an illusion that will break as soon as COVID-19 is under control.

Are they right? Will UPS share price fall?

Why UPS Stock Went Up

In the past decade, the universal adoption of smartphones and other mobile devices has made shopping online easier than ever before. Consumers can make purchases whenever and wherever the impulse strikes, which is far more convenient than taking a trip to traditional brick-and-mortar stores. 

Amazon has been especially accommodating in an effort to encourage online shopping. Those that enroll in the Amazon Prime service get fast, free delivery, no matter how many purchases they make.

Many other platforms attempt to match that offer in an effort to pull business away from the e-commerce giant. The competition for online shoppers generally boils down to delivery, which positions UPS to benefit as the trend towards e-commerce grows. 

In 2019, 14.1 percent of all retail sales worldwide were made online, and that figure is expected to reach 22 percent by 2023. Of course, that calculation was made before COVID-19 made headlines, and many industry experts project that the figures for 2020 will prove to be substantially higher year-over-year. 

All of those purchases have to be delivered by one of a handful of carriers with the infrastructure to support speedy delivery worldwide. For the most part, that means that increased use of e-commerce generates revenue for UPS, FedEx, and the US Postal Service.

In 2019, UPS delivered 21.9 million packages every day, which totals approximately 5.5 billion packages in a single year.

In 2020, the increased use of UPS services created a perfect environment for more deliveries and enhanced revenues, which translated into more valuable stock.

UPS Financials Beat Analysts’ Expectations

UPS exceeded analysts’ expectations in three of the past four quarters, and the consensus is that there is a lot to look forward to from 2020’s third quarter results.

Demand for residential deliveries has skyrocketed, which is important, because residential deliveries are the main driver of UPS revenues.

Deliveries to healthcare organizations have also gone up, which improves the company’s overall performance, because business-to-business sales tend to be more profitable for UPS (UPS). 

Second quarter 2020 results brought a welcome surprise for investors and something of a shock for analysts who pride themselves on the accuracy of their predictions.

Earnings per share increased 9 percent for a total of $2.13 per share, which dramatically outperformed the predicted 46 percent EPS decline to $1.06 per share.

Revenue increased by 13 percent to a total of $20.46 billion, which again exceeded the predicted revenue of $17.34 million – a 4 percent year-over-year drop. 

It’s true that full-year earnings are still expected to drop 7 percent over 2019 figures, but that doesn’t seem like such an issue when you consider that full-year 2020 was originally expected to come in 27 percent lower than 2019.

Is UPS Valuation Too High?

UPS is currently trading at a price-to-earnings ratio of approximately 33, which is certainly a bit high under the circumstances.

While the company is delivering stronger-than-expected results for 2020, there is some question as to how long that can be sustained.

A majority of investors and analysts project more revenue growth – and subsequent earnings growth – in 2021, but there is no consensus on what those figures might look like.

The current share price reflects hopes that UPS will continue to outperform analyst predictions, bringing more positive news in coming quarters. 

So does that mean that UPS valuation is too high, or is it spot-on considering the potential for revenue and earnings growth?  While the performance of a given company – and the market as a whole – is never certain, UPS looks like a solid buy.

Even if the rate of growth slows, which doesn’t appear likely in the near-term, the company is likely to continue delivering earnings for shareholders.

The current yield is 2.5 percent, which reflects two decades of steady increases. That’s enough to earn UPS a place in your portfolio at the current share price.

Will UPS Stock Drop?

It’s possible that UPS stock will drop, given the unpredictable nature of the COVID-19 economy, but there is no reason to think that UPS is on the verge of losing value independent of larger market conditions.

The company is thriving amidst pandemic-related challenges, and there is no end to that in sight. With the busy holiday season fast approaching, 2020’s fourth quarter results could be like nothing the company has ever seen. 

Once the pandemic is brought under control, there is a possibility that demand for UPS services will decline.

However, it appears unlikely that demand will fall to pre-pandemic levels, as the use of e-commerce was already increasing prior to COVID-19. It is more likely that this situation simply compressed the timeline for adoption of e-commerce, and consumers will continue to make more of their purchases online now that they have developed a level of comfort with the technology. 

Is UPS Stock Overvalued? The Bottom Line

The bottom line is that UPS stock is trading a little higher than one might expect, but share prices appear to accurately reflect the company’s ability to profit during a particularly challenging time.

While there is an argument that 2020 growth will stall or move backwards when the pandemic is no longer an issue, it is more likely that consumers will continue their transition to e-commerce, making UPS stock a smart buy. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.