Is UPS Fairly Priced At $100?

by Trefis Team
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United Parcel Service (NYSE:UPS) stock declined around 14% from over $115 levels in the beginning of this year to $101 on April 20, compared to a 13% decline for the broader S&P 500. While UPS’ stock has performed in line with the broader markets, we believe that it is now fairly priced, and there will likely be only a limited upside from the current levels. They key is that UPS stock has been underperforming, with the stock down -8% since the start of 2018 (vs. 3% growth in S&P 500), a little over two years ago, and after seeing a significant decline in March 2020, given the current coronavirus crisis and its impact on the global economy, the stock managed to recover around 17% from its lows (vs. around 25% rebound for S&P 500). Our dashboard, ‘What Factors Drove 8% Change In UPS’ Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price decline over the past two years can primarily be attributed to a decline in earnings. While UPS’ revenues were up 11% from 2017 to 2019, its net income margin declined 19% from 7.4% to 6.0%. This combined with a modest decline in number of shares, led to a 9% decline in EPS.

An increase in UPS’ P/E multiple also aided the rise in the company’s stock between 2017 and 2019. UPS’ P/E multiple grew from 19.6x in 2017 to 22.6x in 2019. Moreover, UPS’ P/E is down to about 19.7x now, given the volatility of the current situation. This reflects a 0.4% increase in P/E multiple since December 2017. We believe there is a limited upside for UPS’ multiple when compared to levels seen over recent years – P/E of 23x at the end of 2019, and 20x currently.

How Is Coronavirus Impacting UPS’ Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity, while the global economy is feared to go into recession. UPS’ near term revenues could take a hit, due to lower shipments in the event of a global recession, as discretionary spending falls. Though it could see a continued uptick in ground shipment revenues, as people stay at home and order required products online.

Between January 31st and April 20th, UPS’ stock hasn’t seen any absolute change (though it declined 15% and it has now recovered back to early February levels) vs. about a 12% decline in the S&P 500. A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Benchmark oil prices have crashed over 60% from $56 levels (Brent) to $20 currently (through April 20). Lower fuel costs will aid UPS’ margin, given fuel expenses account for 5% of the company’s total operating expenses.

For UPS, its domestic as well as international shipments could be meaningfully impacted in the worsening economic conditions, In fact, the average consensus revenues of $16.3 billion for Q2 2020 reflects over 10% decline, compared to the prior year quarter. We believe UPS’ Q1 results next week will confirm the trend in revenues. It is also likely to accompany lower guidance for the full year. Going by our valuation for UPS, we believe that the company’s stock has a limited upside potential from the current levels.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

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