United Parcel Service (UPS +0.06%), usually just known by its ticker UPS, has been working through a turnaround. Wall Street hasn't been impressed with its efforts, but in the back half of 2024, the company's performance turned an important corner. Right at that moment, management announced a big change in its relationship with its largest customer, which upset investors anew. Here are three reasons why now is the time to buy this stock.
1. UPS looks attractively priced
UPS' stock is trading near 52-week lows, down around 20% over the year. The shares have lost half their value since hitting a peak in early 2022. This is an unloved company right now. The dividend yield is up to 4.8%, which is near the highest levels in the company's history. Notably, the yield is higher now than it was during the Great Recession, when the world was concerned that the entire global financial system might collapse. From these perspectives, the stock looks deeply unloved.
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That story is backed up by looking at more traditional valuation metrics. The price-to-sales, price-to-earnings, and price-to-book value ratios are all below their five-year averages right now. To be fair, there are reasons for the company to be out of favor, including a period of weak operating performance.
However, management has been addressing the issues it faces, and in the back half of 2024, key performance metrics started to improve. In the third quarter of that year, CEO Carol Tome announced that the company had "returned to revenue and profit growth." Effectively, she was telling the world that UPS had finally turned the corner, with further improvement in the fourth quarter confirming the positive momentum.
So UPS appears to be out of favor, but it is now working from a position of strength and not weakness. That's important, because the opportunity right now is seeing the good news in the bad news management announced in Q4 (more on this below).
NYSE: UPS
Key Data Points
2. UPS has a system that's hard to match
One of the key things to remember about UPS is that it is a logistics giant. The company's brown-clad employees and trucks can be seen in every city and town in a coordinated dance that allows for packages to be delivered quickly and in a cost-effective fashion.
There is a lot more to the puzzle than just those trucks and employees. There are sorting facilities, airplanes, and a store base that allows UPS a business reach that would be hard, if not impossible, to replicate. Even Amazon (AMZN +2.02%) has yet to fully match what UPS has to offer (more on this below, too).
The only other major competitors out there are the U.S. Post Office, Duetsche Post (owner of DHL) and FedEx, which is focused more heavily on the overnight delivery niche. There have been attempts by European competitors to break into the U.S. market, but they haven't panned out quite as well as hoped.
This isn't to suggest that UPS' business position could never be disrupted. But UPS clearly has a well-entrenched business, and given the upturn in its business performance, it seems likely that it will be able to protect that position, despite Wall Street's concerns about the company right now.
3. UPS really upset Wall Street with its Amazon announcement
So UPS stock looks cheap despite improving performance, and UPS has a strong market position. Why is the stock so unloved, with a steep decline after Q4 2024 earnings? Just as the company was explaining that it had turned an important corner performance-wise, it announced that it was going to reduce its dealing with its largest customer, Amazon. The business it does with the online retail giant is slated to fall by 50%!
Instead of looking at this decision and fearing the outcome, it's important to ask why this is being done now. First, as noted above, management clearly believes that it has turned an important corner with the business. Working from a position of strength, it is now trying to fine-tune its operating performance. UPS has been looking to focus on higher-margin business, and Amazon just doesn't fit that mold, since it is a high-volume but low-margin customer. The relationship between the two companies won't end, with UPS noting that it offers return services that Amazon doesn't.
While it is true that this decision will likely hurt the company's business in the near term, it will strengthen it over the long term. Notably, it will allow the company's higher-margin operations (which are growing in areas like healthcare) to shine through in its financial performance. It will also free up the company to expand in more profitable areas, because it won't be wasting resources on the low-margin Amazon business. In other words, UPS is upgrading its business. That's not a bad thing. In fact, it should probably be seen as a very good thing for investors who think in decades and not days.
Hold your nose and buy UPS
The turnaround at UPS is clearly still a work in progress, so this stock probably isn't the best choice for risk-averse investors. However, if you like turnarounds or have a penchant for high-yield stocks, you'll want to take a close look at UPS today. If you wait until some distant tomorrow, you might miss the opportunity to buy it. Remember, it has an attractive valuation and high yield and a well-situated business, and it's willing to make the hard calls that will make the company better over the long term.
