Yahoo Finance UPS Stock Trading Higher Than Industry at 15.1x PE: Time to Sell?
From a valuation perspective, United Parcel Service UPS is not attractive. UPS is trading at a forward price/earnings of 15.1x, higher than the industry's average of 14.3x and 40% above its five-year low.
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This Atlanta-based package delivery company’s valuation compares unfavorably with that of rival FedEx FDX. FDX is currently trading at a forward price/earnings of 13.2x.
UPS’ expensive valuation is anything but attractive for investors. Should they be wary of investing in UPS at current prices? Let’s delve deeper.
Factors Working Against UPS
UPS is currently suffering from revenue weakness as geopolitical uncertainty and higher inflation continue to hurt consumer sentiment and growth expectations. The weak demand scenario has led to a decline in the volume of packages shipped. Due to the weakness, average daily volumes (consolidated) are suffering. With shipping volumes likely to remain weak, UPS cut its revenue outlook for the current year last month.
For 2024, UPS now anticipates revenues to be around $ 93 billion (prior view: $92-$94.5 billion). For 2024, UPS now expects the consolidated adjusted operating margin to be around 9.4% compared with the prior expectation of 10%-10.6%.
The 2024 guidance includes revenues from its truckload brokerage business Coyote Logistics, which UPS is selling to RXO, Inc. RXO. The transaction is expected to be closed by 2024-end, thereby freeing up cash that UPS aims to deploy for buying back shares worth $500 million.
Labor costs, courtesy of the deal with the Teamsters union, are likely to be high, limiting bottom-line growth. Per UPS management, due to this deal, wage and benefit costs will increase at a 3.3% compound annual growth rate for the next five years. We expect UPS’ expenses on compensation and benefits to increase 3.3% in 2024 from 2023 actuals.
Rising capital expenses in this era of revenue weakness are not welcome and may dent profit margins. In 2022, UPS incurred $4.8 billion of capital expenditures, up 13.7% year over year. Capex increased further to $5.2 billion in 2023. The capex guidance of $4 billion for 2024 is not very low. Capital expenditure spending doesn't come to an end after buying an asset. Companies need to keep up with repairs and maintenance to protect the value of the investment.
UPS' financial metrics indicate that its leverage is elevated and is a massive negative for its shareholders. The long-term debt burden of the company was $20.2 billion at the end of the second quarter of 2024. UPS' long-term debt burden at 2023-end was lower at $18.9 billion.
Long-Term Debt to Capitalization
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Unfavorable Readings on UPS Stock
Earnings per share estimates for UPS have been revised downward over the past 60 days, reflecting pessimism.
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Shares of UPS have declined 16.6% over the past six months. UPS stock has underperformed not only its industry but also the S&P 500 Index. Additionally, UPS’ price performance compares unfavorably with that of rival FDX.
Six-Month Price Performance
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UPS shares are trading below the 50-day and 200-day moving averages, indicating a bearish trend.
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Some Tailwinds
It is hardly surprising that the pace of growth of e-commerce demand has slowed from the levels witnessed at the peak of the pandemic, with the reopening of economies. However, it remains impressive, driven by the convenience associated with online shopping. E-commerce demand strength should continue to support the growth of transportation players like UPS.
UPS demonstrates financial strength with $5.3 billion in free cash flow generated in 2023. Shareholder-friendly actions, including the 15th consecutive annual dividend increase and a $5 billion share repurchase authorization, bode well. In 2024, UPS’ board of directors raised its quarterly cash dividend to $1.63 per share. For full-year 2024, UPS expects to make dividend payments of $5.4 billion.
Steer Clear of UPS
The negative sentiment surrounding the stock is quite evident, with earnings per share estimates for UPS moving south due to the reasons mentioned above. Investors have ample reason to be wary of investing in UPS stock currently.
As there is significant doubt about whether the challenges facing UPS will ease in the near term, investor sentiment surrounding this transportation heavyweight is unlikely to get a boost any time soon. The combination of its weak current performance and an uncertain future cast a shadow over UPS’ prospects. So, the stock, currently carrying a Zacks Rank #4 (Sell), appears a risky prospect for investors.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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United Parcel Service, Inc. (UPS) : Free Stock Analysis Report
FedEx Corporation (FDX) : Free Stock Analysis Report
RXO INC (RXO) : Free Stock Analysis Report
