United Parcel Service (UPS +0.06%) offered investors good news when it reported fourth-quarter 2024 earnings in late January. It also provided investors with news that could easily be seen as bad. But if you step back from that bad news, you'll see that UPS, as the company is normally called, is actually willing to take some near-term pain to provide a long-term benefit to the business. Here's why UPS is worth buying as it sits below $120 per share.
What does United Parcel Service do?
If you see a large brown delivery truck, you probably know what company it represents. The same is true if you see a delivery person in a crisp brown suit. While UPS doesn't have any kind of ownership on the color brown, it most certainly is associated closely with the mundane hue. There's a reason for that: UPS's trucks and delivery people are ubiquitous throughout the United States. That speaks to the breadth of its pickup and delivery network.
Image source: Getty Images.
For the most part, UPS does a very good job of getting packages from one place to another quickly and cost-effectively. It also has a store network that allows it to take returns, an increasingly important aspect of the economy given the growth of online retail (more on this in a second). That said, package delivery is a competitive business and getting more competitive. Specifically, Amazon.com (AMZN +2.05%) has created its own in-house delivery network.
Keeping costs in check has become an important factor in the competitive landscape. UPS has addressed this by closing facilities and automating as much of the delivery process as possible. A prime example is the use of RFID tags to track packages so that human beings don't have to be as involved in the sorting process. That said, modernizing an established business isn't cheap or easy, even when it's the right thing to do.
UPS is down, but not out
During the earlier days of the coronavirus pandemic, investors got excited about package delivery. More online shopping by people stuck at home meant more packages that needed to be shipped. But Wall Street has a habit of taking good ideas way too far when it comes to stock prices. And that appears to be what happened with UPS' shares, which peaked at more than $230 in 2022. UPS' stock price plunged to below $120 when it became clear that the world had learned to live with the virus.
Along the way, the business had to face down some demons that had built up over time. That notably included selling off noncore businesses, updating its operations, refocusing on more profitable business lines such as healthcare, and attempting to diversify its customer base. This complicated the financial picture, turned investors off in a big way, and probably exacerbated the share price decline.
That said, the company turned an important corner in the back half of 2024. Specifically, revenue and earnings were lower year over year in the first and second quarters of 2024 but higher in both the third and fourth quarters. This is great news and suggests that UPS has finally found its footing again.
There's only one problem. When UPS released fourth-quarter results, it also announced that it was going to change its relationship with its largest customer, Amazon.com. The goal is to reduce Amazon volume by 50%, which is a huge change. Why make this decision right as the broader business seemed to be turning higher again? The answer is that Amazon is low-profit volume and UPS is making a decision that will help improve its long-term margin outlook.
Doing that now, meanwhile, is really a sign that UPS is finally working from a position of strength again. Basically, after years of reworking its business, it's now in a position where it can handle this change.
Notably, Amazon isn't going away as a customer and probably won't anytime soon. The key on that front is that Amazon doesn't have a strong return network, but UPS does. So UPS is basically leaning into a strength by leaning away from what amounts to low-value commodity services that Amazon is increasingly doing on its own anyway. In all, UPS appears to be making a difficult but astute decision.
UPS is doing the right things
Is UPS a buy while it's under $120 a share? (It closed on Thursday at $117.63.) My answer is: Most likely, given that it's turned a corner financially and is continuing to work toward improving its business for the long term. Add in a very generous 5.5% dividend yield, and you're getting paid well to wait for Wall Street to catch on to the fundamental successes taking shape at UPS. Dividend investors, turnaround investors, and contrarian investors should all find United Parcel Service attractive today.
