Jun 24, 2022
[7 min Read]
United Parcel Service, Inc. provides letter and package delivery, transportation, logistics, and related services. It operates through two segments, U.S. Domestic Package and International Package. The U.S. Domestic Package segment offers time-definite delivery of letters, documents, small packages, and palletized freight through air and ground services in the United States. The International Package segment provides guaranteed day and time-definite international shipping services in Europe, Middle East, Africa, Canada, and other countries/continents.
In order to undergo a comparable analysis (to determine UPS stocks value), we need to first outline who UPS's competitors are.
These competitors need to be publicly listed, have valid financial metrics/multiples, operate in a similar manner to UPS, and have a market cap similar to UPS (if possible).
By keeping this in mind, I found the following list of companies to be some of UPS stocks closest competitors:
Overall, UPS had a fantastic financial performance in 2021, which is mostly thanks to the impacts that COVID-19 had on consumer purchasing and preferences. As a result of COVID many customers and businesses switched to e-commerce. A necessary component of such a shift is to have a delivery system in place to get your product to the paying customer, which requires you to ship them a package. This switch has been music to the ears of shipping giants like UPS, Fedex, DHL, and many more. However, 2021 might have been a "outlier" of a year, as it blew their (pre-covid to a certain extent) 2020 results out of the water. However, now that e-commerce has become the new normal, UPS's earnings should start to slow down and potentially top-off somewhere. With that being said, let's look at how their Q1 2022 results compare to their Q4 2021 results to get a better idea of current (new normal) performances.
Overall, it seems as though UPS had a poor financial performance as many of their financial metrics shrunk, most notably their EPS (by $-0.48), as well as their net income (by $-431M), and other metrics (as you can tell from the above bullet points). On the surface it appears as though UPS's earnings might have already peaked, however, Q4 2021 is the holiday season, which is very beneficial and profitable for shipping companies like UPS. As a result, a better way to gauge their earnings is based off of their performance relative to analyst expectations (as they likely expected their revenues to decline after the holiday season.
However, UPS stock beat their EPS estimate by $0.17 (or 5.9%), as they reported an EPS of $3.05 for the quarter (compared to their estimated EPS of $2.88). This shows us a vastly different story than just their earnings figures (as a result of the seasonality of UPS's business.
As part of their Q1 2022 earnings release, UPS stated that they currently have 874M Shares Outstanding (weighted average), which is down -1M shares (from 875M shares outstanding in Q4 2021). Furthermore, UPS stock has up to 4M of shares that they can issue (thereby diluting UPS's stock). Overall, it is great that UPS has been buying back shares, as it increases the value of the shares of existing shareholders, and the fact that they have been buying back shares is an indicator that it may continue to happen into the future. However, we also need to keep in mind the fact that they can issue up to 4M shares of the UPS stock. If this were to happen it would decrease the value of existing shares by less than 1%, which is not a huge deal, but may mean that their next couple of quarters may not experience a "net buyback".
In a publication from globenewswire (based off of the research from "Researchandmarkets.com") they expect the global couriers and messengers industry to grow to a $1.25T industry by 2026, which would represent a 14.6% CAGR from their 2022 industry valuation of $725B. This is a very high expected growth rate, and is very good news for courier stocks (like UPS).
Here is the current spread of UPS stock ratings. In total there are 30 UPS stock ratings, which fall in the following categories.
Analyst Ratings have provided relatively strong indicators of future price movement, which is why they are used to determine if UPS stock is a buy or sell. Overall, the majority (60%) of analysts have given the UPS stock a "Buy" rating, and 27 of the 30 analysts have given either a "Buy" or "Hold" rating, which implies that 90% of analysts are either bullish, or have a neutral stance on the UPS stock (which is good news)
Overall, UPS stock is overvalued and needs to experience a change in stock price of (an average of) -12.77% to be considered “at fair value”. This is a very quick comparable, and may have flaws. This may be the case when comparing UPS's P/B to their competitors as there is a large difference in their ratios. However, looking outside of the P/E and P/B ratios, UPS seems to have better or similar ratios to that of their competitors.
Overall, there are both positive and negative aspects of the UPS stock.
Firstly, on the positive side: UPS earnings have been great recently with their monumental 2021 performance, as well as their recent EPS beat on their Q1 2022 earnings; UPS bought back more shares than they issued over the past quarter; analysts are generally bullish on the UPS stock; and their industry outlook implying a CAGR of 14.6%.
Alternatively, on the negative side: UPS could issue up to 4M shares which would dilute their stock by less than 1% (not a huge deal); also my quick UPS comparable analysis implies that they are overvalued, however, it may be skewed a bit to the negative side (as discussed previously).
Based off of weighing both the positive and negative aspects of the UPS stock, I think that they are undervalued and have room to grow. I think that 10-20% share price growth is attainable, and what I would be willing to exit a position in UPS at.