United Parcel Service (UPS 1.38%) stock is trading down 26% from its 52-week high amid a string of disappointing quarterly results. The logistics and transportation leader has struggled to navigate a shifting operating landscape between lower shipping demand and inflationary cost pressures.
On the other hand, early signs of a potential turnaround in the company's latest update offer investors room for optimism. Could shares of UPS make a good addition to your portfolio now? Here's what you need to know.
A potential turning point for UPS
A lot has changed for UPS since an online spending-driven shipping boom drove the stock to a record high of $208.86 in February 2022. The company simply failed to live up to high-growth expectations as the markets noted package volumes faltering. Earnings were further pressured as higher fuel and labor costs squeezed profitability margins.
Part of that weakness also factors in some lost business from its major customer Amazon. The e-commerce giant expanded its in-house delivery capabilities at the expense of UPS' third-party handling. Amazon represented approximately 11.8% of its total business in 2023, modestly down from as high as 13.3% in 2020.
These trends continued in 2024. UPS reported a 1.1% year-over-year decline in second-quarter revenue. Q2 earnings per share (EPS) at $1.79 was down 30% from Q2 2023, particularly affected by a new labor agreement raising wages and adding to expenses to its U.S. operations.
These metrics all suggest reasons for concern, but a deeper look provides several reasons to believe UPS may be at a turning point.
Notably, domestic package volume climbed by 1% year over year in Q2, the first positive result in nine quarters. Demand also improved in areas like air freight and export markets internationally as an encouraging signal. The company expects a broader growth rebound into the second half of the year, alongside a firming operating margin. Overall, there is some optimism that the worst conditions are now in the rearview mirror.
Image source: Getty Images.
An attractive valuation
UPS went through a challenging period reflective of the volatile macroeconomic environment. At the same time, it is important to recognize the underlying strengths that support a positive long-term outlook.
The company remains profitable and generates significant cash flows. For the full year, management is guiding for free cash flow of $5.8 billion, more than covering its $5.4 billion annual dividend payout. On this point, the stock yields a compelling 5% through a quarterly $1.63 per share dividend backed by a solid balance sheet. UPS ended the last quarter with more than $6 billion in cash and a debt-to-EBITDA leverage ratio under 2.5. Beyond any quarterly financial noise, UPS appears fundamentally healthy and can ultimately emerge stronger as the global economy enters a new growth cycle.
The concerns regarding UPS' relationship with Amazon may be overhyped. Even with the decline in revenue, the understanding is that UPS will continue to play a critical role in supplementing Amazon's supply chain network as both companies expand internationally. Ultimately, the e-commerce landscape is bigger than just one company and UPS is well-positioned to grow alongside the entire transportation market.
Maybe the best reason to buy UPS stock is its discounted valuation. Shares are trading at just 17 times the consensus EPS estimate for 2024. This forward price-to-earnings ratio comes in below the five-year median average for the multiple closer to 20, implying the stock is undervalued. The ability of UPS to get back on track with climbing earnings growth should be a catalyst for the stock to rebound.
UPS PE Ratio (Forward) data by YCharts
Decision time on UPS stock
I am bullish on UPS and expect shares to deliver a positive return over the next year. The stock deserves a buy rating based on the company's improving growth outlook and an attractive valuation. Recognizing the main risk in a scenario where the macroeconomic environment deteriorates, investors with a long-term time horizon have an opportunity here to start a position in an industry leader at a beaten-down price.
