1 Key Metric Makes UPS Compelling

Down 12.1% over the past year versus a 22.1% gain in the S&P 500 over the same period, UPS (NYSE:UPS) appears to be a stock worth skipping past, at least at first glance.

The more you look below the surface, though, the more there is to appreciate about this global leader in logistics and package delivery.

Indeed, it’s quite possible that the relative underperformance over the past year spells opportunity for bargain hunters.

What Makes UPS Special

The cornerstone of a successful business is one that optimizes for revenues while keeping costs in check, thereby growing profits. UPS has cracked this nut pretty well by using advanced logistics algorithms that optimize delivery routes, reduce fuel consumption and speed up delivery times.

Management has figured out how to streamline package handling processes too via smart logistics systems and automation, which reduce the likelihood of errors and delays, and enhance overall operational efficiency.

That is evident in the enormous profitability the firm currently enjoys, posting $13.7 billion in earnings before interest and taxes in fiscal year 2022 and $2.9 billion last quarter alone.

Not content to rest on their already innovative logistics technology, UPS has adopted new approaches that includes drones for last-mile delivery and even blockchain for improved tracking and security of packages.

The mix of packages delivered is extensive and even includes sensitive products like vaccines and pharmaceuticals that require stringent controls and specialized equipment. By delving into the healthcare logistics space, UPS must be compliant with healthcare regulations and yet it has succeeded in innovating with temperature-controlled packaging and real-time tracking for sensitive medical shipments.

The breadth and scale of UPS’s network means it provides a pulse on the overall economy, and indeed the global one too. When shipping volumes undulate, they tend to reflect global economic activity. In fact, those volumes are a key metric that astute investors follow to gauge world trade flows.

Is UPS Stock Undervalued?

According to 30 analysts, UPS stock is undervalued by 3.6% with fair value sitting at $166.10 per share. 

A discounted cash flow forecast analysis is less optimistic and pegs the intrinsic value of UPS closer to $162 per share.

The reason the cash flows are not positive is the top line has been falling at an accelerating rate. In Q4 2021, UPS revenues hit a quarterly high of $27.7 billion. Since then they have generally been falling and came in last quarter at $21 billion.

However, trading at a 15.9x price-to-earnings ratio at this time, it seems the analysts might have it right that there is some upside, albeit marginal for UPS shareholders now.

Even without a compelling valuation argument, there are other reasons to be upbeat about UPS. Take the dividend, for example, that sits at 4.05% and has a payout ratio of 62%, a respectable figure that suggests the annualized $6.48 per share payout is in no jeopardy.

With $93 billion in revenue over the past year also, the top line is the envy of many a company with better growth rates. Speaking of which, the 5-year revenue CAGR is just 2.1% while net income is expected to slide by 0.8% annualized over the next 5 years.

For now it seems that the 14 year streak of paying dividends is a key reason to buy the stock, more so than any expectation of growth or undervaluation unless of course a surprising growth lever appears, but what could that be?

Growth Levers

One factor that plays in favor of UPS bulls is its expansion into emerging markets, which offer significant growth opportunities.

So too the company has the opportunity to build upon its massive revenue base through acquisitions.

A further lever stems from its ability adapt to e-commerce trends, especially with respect to last-mile delivery innovations.

Even without any major traction in these areas, UPS has already cemented itself in the package delivery ecosystem as having an enormous competitive edge. The firm’s moat is evident from its return on invested capital sitting well above the industry average at 17.9%. Plus, its return on equity of 47.4% shows how capital efficient the firm is.

Is UPS Stock a Buy?

The pluses for UPS seem to outweigh the minuses. Massive revenues and enormous profits sit firmly in the plus column while slowing revenues and diminishing profitability check the boxes in the minus column.

Nonetheless, the healthy 4% dividend yield that should remain in place for the foreseeable future and offers a buffer against share price undulations.

And given how close UPS share price is now to analysts’ consensus price target, it seems reasonable to expect that share price volatility could sit close by on the horizon.

A meaningful selloff would create a better entry point, at least on a valuation basis, at this time. For long-term investors, the company’s moat alone will ensure UPS weathers any economic turmoil that lies up ahead, even if the waters get choppy.

The bottom line is UPS is most likely a better buy on a pullback, but a toe can be dipped into the waters for eager beavers who have a longer term outlook.

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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.