JP Morgan Could Be Wrong About UPS

The stock is undervalued, contrary to popular belief

Summary
  • UPS exhibits high-quality operating activities.
  • Freight rates are calming down.
  • UPS is an undervalued stock with solid dividend prospects.
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Shares of United Parcel Service Inc. (UPS, Financial) recently slipped after Brian Ossenbeck, an analyst at J.P. Morgan, downgraded its stock from buy to neutral. Ossenbeck's central argument is the company lacks a catalyst that would drive its price higher; however, there are a few flaws in his claim.

A few catalysts

UPS has faced significant systemic headwinds over the past two years because of the global supply chain restrictions. However, forward-looking analysts would be contrarian in the economy's current climate. To elaborate, I believe that current reopenings will be a cause for transitory supply chain issues to be resolved. Additionally, rising interest rates could lead to stabilizing inflation, in turn transmitting calm to global consumers.

Lastly, global freight rates appear to have taken a turn for the better. In March, the global freight rates declined to $8,200, which is a significant improvement from 2021's highs of $10,400.

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Source: Statista

Operating earnings and activities

On April 26, UPS delivered an earnings beat of 16 cents per share for the first quarter of 2022. During the three months ended March 31, the company's year-over-year profits increased by 17.6%, while revenue grew 6.4%.

In a statemtne, CEO, Carol Tomé said, "The agility of our network and the continued execution of our strategy delivered another quarter of strong financial performance, putting us on our way to achieving our 2022 consolidated financial targets."

I am not surprised by UPS's recent earnings performance. The company has established a powerful market position, allowing it to possess pricing power over its customers and bargaining power over its suppliers. Additionally, it is not as exposed to the economic cycle as many may believe because of its breadth of items transported and its midstream presence.

Valuation and dividends

Several metrics indicate UPS is undervalued. First, the stock is trading at with a price-earnings ratio of 18.37, indicating investors haven't priced the company's net income in just yet. Additionally, GuruFocus' latest earnings per share metric for UPS implies the company's per-share earnings are steepening, thus creating a value gap.

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UPS is flourishing from an income-generating vantage point. The stock delivers a dividend yield of 2.58%, which is highly lucrative compared to over half of the other companies in the transportation industry.

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The bottom line

UPS is underappreciated. J.P. Morgan may not be bullish on the stock, but key metrics indicate it is an undervalued play with an attractive dividend yield. There are also a few catalysts in the offering, which market participants have overlooked.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure