United Parcel Service Inc. (UPS, Financial) has suffered a decline of just over 13% year to date.
This is a better performance than the S&P 500 Index, which has lost more than 17%, or the industrial sector, which is lower by almost 16%.
UPS has slightly outperformed its own sector and the broad market averages because its business performance in recent quarters has been solid, especially coming off the high growth rates seen during the worst of the Covid-19 pandemic.
Following the decline in price, are shares offering enough potential return to justify investment in the stock? This analysis will examine the company in further detail to answer that question.
Takeaways from recent earnings results
UPS reported third-quarter earnings results on Oct. 25 that were mixed. Revenue grew 4.2% to $24.2 billion, but this was $161 million less than the market had expected. Adjusted earnings per share of $2.99 compared to $2.71 in the prior year and was 14 cents above estimates.
While revenue did miss, the quarter showed continued strength in the overall business. For example, third-quarter revenue growth for 2021 and 2020 was 9.2% and 16%. The overall growth rates have slowed, but UPS has not seen a drop since the Covid-19-fueled demand of 2020. Customers continue to use the company’s services at a higher rate.
UPS is also able to charge more per piece that it ships. Consider the company’s largest segment, its U.S. Domestic business. Revenue grew 8.2% to $15.4 billion for the quarter. Average daily volume did fall 1.5% for the period, but a nearly 10% increase in revenue per piece more than offset the small fall in demand. Pricing likely led to fewer pieces being shipped, but not very much as demand hardly fell.
One area of note is the decline in business-to-consumer average daily volume of 2.2% year over year compared to just a 0.5% decrease in business-to-business.
That said, the holiday shopping season should be an opportunity for an improvement in volumes. According to Adobe Analytics, Black Friday sales reached a record $9.1 billion in the U.S. Even without inflation, sales still grew compared to the prior year. Sales for Cyber Monday grew 5.8% to a new record $11.3 billion. In short, the holiday shopping season will keep UPS, and its peers, busy over the next month or so as demand for goods is not being impacted by the higher cost per piece.
The international segment had revenue growth of 1.7% to $4.8 billion, driven by revenue per piece increasing 6.4%. Demand in this segment was lower as volume fell more than 5%. Currency exchange rates also negatively impacted results.
Revenue for Supply Chain Solutions was 6.3% lower to just under $4 billion. Air and ocean freight volumes fell, but the company’s logistics and health care businesses partially offset this weakness.
The increase in pricing is also positively benefiting margins. The company’s adjusted operating margin expanded 20 basis points to 13%, with all three segments showing improvements.
Following quarterly results, UPS reaffirmed its previously issued guidance for 2022. The company expects revenue of $102 billion, which would be a 5% increase from the prior year.
According to Morningstar Inc. (MORN, Financial), analysts expect UPS to produce earnings per share of $12.88 in 2022, which would be 6.2% higher than results in 2021.
Impressive rankings versus peers
UPS has steadily increased revenue and, to a large extent, net income for much of the last decade.
If the company delivers on expected numbers for this year, that trend will continue.
Looking at a number of metrics, UPS is clearly a leader in its industry. This is clear in its GF Score, which is a strong 93 out of 100 and suggests that the company has the potential for high outperformance. This score reflects strong ratings for profitability, growth and momentum and middling scores on value and financial strength.
The company’s best category is profitability, where UPS has a near-perfect score of 9 out of 10. The company is near the end high of its peer group on nearly every metric, including return on assets, return on equity and return on invested capital, showing that UPS has been highly successful at generating profit over long periods of time. All three scores are near the best levels of the last decade for the company. UPS has been profitable every year for the last 10 years, putting the company ahead of 99.9% of its peer group.
Financial strength is UPS’s weakest area, but still scores a solid 6 out of 10. Debt levels have increased over the years, which have led to cash-to-debt and debt-to-equity ratios that have fallen below peers. The good news is that bankruptcy seems highly unlikely. The Piotroski F-Score of 8 out 9 shows that UPS is on a very stable financial footing and the Altman Z-score of 4.5 means that the company is not headed toward bankruptcy. Returning to the theme of profit generation, UPS also has a very strong ROIC of 21.7%, which is well ahead of its weighted average cost of capital of 7%.
Valuation analysis
Using analysts’ estimates for the year, shares of UPS are trading at 14.4 times forward earnings estimates. This compares favorably to the price-earnings ratio of 17.4 that UPS averaged for the last decade, according to Value Line, suggesting a sizeable return from current levels if the stock were to revert closer to its long-term average valuation.
The GF Value chart shows a more conservative potential return.
UPS has a price-to-GF Value ratio of 0.92, suggesting a potential return of 9.2% from the current share price. This would be before factoring in the dividend, which has been raised for 13 consecutive years, with a most recent increase of 49%. Shares yield 3.3%, nearly twice the average yield of 1.7% for the S&P 500 Index.
Final thoughts
The most recent quarterly results show UPS continues to perform well. Volume declines are present, but are still low and more than offset by price increases. The holiday shopping season should also provide a tailwind to the current quarter as well.
UPS has several other factors working in its favor as the company scores very well on many different metrics and has a long history of growth. Shares are also trading well below the historical average valuation.
The decline in share price has led to shares trading at a solid discount to intrinsic value, which could, in combination with the dividend yield, lead to double-digit total returns. This could make UPS a name investors might want to add to their watchlist.
