United Parcel Service Offers Good Long-Term Value

Core Viewpoint - United Parcel Service, Inc. (UPS) has experienced a significant decline in share price, down nearly 17% over the past year, underperforming compared to its rival FedEx and the S&P 500 Index, which has seen a total return of over 26% during the same period. However, the stock's valuation has become more attractive, and there is potential for earnings growth to reaccelerate in the coming years, making it a potential long-term investment opportunity [2]. Recent Performance - UPS's earnings-per-share (EPS) grew 9.3% from 2019 to 2020 and surged over 47% in 2021, but faced a 32% decrease in EPS in 2023 due to reduced demand and higher costs [3]. - In the first quarter of 2024, UPS reported a revenue decline of 5.2% to $21.7 billion, missing estimates by $240 million. Adjusted EPS was $1.43, down from $2.20 the previous year, although it exceeded expectations by $0.08. All business segments showed year-over-year declines, with U.S. Domestic revenue down 5% and International revenue down 6.3% [3][4]. Positive Developments - Despite the mixed results, the rate of revenue decline has slowed for three consecutive quarters, indicating a potential stabilization. Each segment's decline rate has also improved, with U.S. Domestic daily volume decreasing by 7.4% in Q4 2023 compared to larger declines in previous quarters [4]. - UPS's price-per-piece remained stable in the U.S. Domestic business, and while union wage costs increased by 13%, the company managed to reduce other costs, leading to a 0.8% decline in adjusted operating expenses [4]. Future Outlook - UPS projects a revenue decrease of 7% for 2024 but anticipates positive sales and volume growth in the second half of the year, which would be a significant turnaround after experiencing mid-single- to low double-digit decreases over the past five quarters [5]. - Analysts have mixed reactions to UPS's quarterly report, with more downward revisions for 2024 revenue and EPS estimates. However, future projections indicate expected growth in EPS by at least mid-teens percentages over the next two years, aided by a new agreement with the United States Postal Service [6][7]. Valuation and Dividend - UPS's stock closed at approximately $139, implying a forward price-to-earnings ratio of just under 17, aligning with its historical average. The company is expected to see volume growth return in the latter half of the year, and analysts project a valuation range of 16 to 18 times earnings, with potential returns of 3% to 16% in 2025 [9]. - The dividend yield stands at 4.7%, one of the highest in over a decade, providing a strong incentive for investors while the company aims for growth. The projected payout ratio for 2024 is 80%, which is high but expected to stabilize with anticipated growth [9].