Two Views on UPS
UPS has been garnering attention on Wall Street recently, as both investment banks had separate “investor meetings” with the company that prompted the revisions in their price targets. BofA reported that UPS is enjoying a solid start to the peak shipping season this year. However, it seems to be trending toward the lower end of its expected 3% to 8% volume growth in Q4 2023. As a result, despite raising its price target, BofA maintained its neutral rating.
On the other hand, Oppenheimer holds a more positive outlook. The investment bank believes that UPS is witnessing an increase in shipping volumes and successfully regaining customers it lost during the period of uncertainty when it was negotiating with its union. Additionally, they noted UPS’s progress in optimizing network flow and cutting costs, which may contribute to stabilizing the company’s profit margin.
Is UPS Stock a Buy?
However, the extent of margin improvements remains uncertain and whether they will be enough to justify UPS’s current valuation of 16 times earnings. There are concerns over declining earnings and profit margins. Despite 3% to 4% volume growth and a dividend yield of 4.1%, UPS has yet to fully justify its modest 16x P/E ratio. Profit margins have experienced consecutive declines since the pandemic, and although they have improved from their lowest point, they have not reached pre-pandemic levels yet.
While higher revenue growth might offset weak margins in the future, most analysts do not anticipate UPS returning to pre-pandemic profitability until 2028 at the earliest. Therefore, valuing UPS stock based on earnings levels that the company is unlikely to achieve in the near term could be a risky strategy, potentially turning the stock into a value trap for investors.