Should you buy UPS stock while it’s below $130?

The package delivery giant UPS‘ (UPS -0.56%) The stock is now up more than 5% and trading nearly 46% off its all-time high. Is this a buying opportunity or a value trap for equity investors?

Here’s what you need to know before buying discounted UPS inventory.

UPS looks like an excellent value

With shares trading at around $128, UPS’s price-to-earnings ratio is 17.3 times Wall Street’s consensus estimate for 2024 earnings. That’s a great valuation for a stock that Wall Street analysts The Street believes it will grow earnings by nearly 20% in 2025. As such, UPS is trading at 14.4 times estimated 2025 earnings. Additionally, management’s three-year plan, presented at its March investor and analyst day, expects adjusted operating profit to grow at a compound annual growth rate (CAGR) of 13% from 2023 to 2026.

UPS Growth Plans

Management’s three-year plan is attractive because it is based on the development of highly successful initiatives. For example, UPS plans to significantly grow its healthcare and small-to-medium business (SME) revenue as part of its framework by focusing on target markets rather than tracking delivery volume per se.

For example, UPS nearly doubled its revenue from the healthcare segment from $5.1 billion in 2016 to $10 billion in 2023. Management plans to develop its cold chain (temperature-controlled storage and delivery), advanced therapies, diagnostics and pharmaceutical delivery capacity to support a doubling. of healthcare revenue to $20 billion in 2026.

UPS’s highly successful Digital Access Program (DAP) helped it grow its US SMB penetration from 27% in 2021 to 29% in 2023. Management plans to expand it to 40% over time through DAP and other digital capabilities.

Investments in automation and smart facilities should increase productivity, allowing UPS to consolidate facilities and improve productivity. All of this adds up to a bright future for the company, with the future likely starting in the second half of 2024.

Image source: Getty Images.

UPS optics will improve in the second half

The company’s earnings are likely to improve in the second half, but not as much as management told investors at its investor day in March. I will explain. Returning to the investor day presentation, management presented a story of two halves for 2024:

• Adjusted operating profit down 20% to 30% in the first half of 2024 compared to the first half of 2023
• Adjusted operating profit increased 20% to 30% in the second half of 2024 compared to the second half of 2024

Management’s confidence in an improvement in the second half of the year is partly based on US delivery volumes turning positive in the second quarter (they did) and easier cost comparisons to the second half of 2023, as the cost increases associated with a new employment contract began in the third. quarter of 2023.

While those assumptions remain, management has lowered some of its growth expectations on the Q2 earnings call:

• The original full-year outlook was for revenue of $92 billion to $94.5 billion and an adjusted operating margin of 10% to 10.6%, implying an adjusted operating profit range of $9.2 billion to $10 billion .
• Updated full-year guidance calls for revenue of $93 billion and a margin of 9.4 percent, implying an adjusted operating profit of $8.74 billion.
• Implied adjusted operating profit for the second half is $4.93 billion. Given that it was $4.4 billion in the second half of 2023, that implies a 12% growth rate, versus the 20% to 30% discussed at the investor day.

We previously discussed what’s wrong with UPS in 2024. To make a long story short, the company only made its revenue guidance for the first half because, according to management on the earnings call, it took lower-margin deliveries from “we are entering e-commerce in the United States.”

Again, this runs counter to management’s “better, not bigger” framework and gives UPS an identity problem it needs to fix in the coming quarters.

Image source: Getty Images.

Is UPS stock a buy?

The stock looks like a good value. Shipment volumes are improving, the company’s long-term plans make sense, and the valuation is attractive. Will UPS stock be higher in a year or so? Probable.

On the other hand, starting a journey in a three-year plan, delivering operating profit growth in the first half of the year at the lower end of the 20% to 30% decline range, and then updating guidance to include a 12% increase for the second half, when previous guidance is 20% to 30%, is not impressive.

UPS is an attractive stock, but don’t buy it if you can’t handle the potential for short-term risk.