After A 75% Rally UPS Stock Looks Fully Priced

After roughly a 75% rise since the March 23 lows of this year, at the current price of around $160 per share we believe United Parcel Services’ stock (NYSE: UPS) has reached its near term potential. UPS stock has rallied from $92 to $160 off the recent bottom compared to the S&P which moved over 50%, with the resumption of economic activities as lockdowns are gradually lifted. UPS stock is also up 47% from levels seen in early 2018.

UPS stock has not only fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic, it is now up 50% from the pre-crisis levels. This seems to make it fully valued, despite the company seeing an increase in shipments thus far in 2020.

Some of this 47% rise of the last 2 years is justified by the roughly 12% growth seen in UPS’ revenues from 2017 to 2019, though earnings were down 9% due to a 19% net margin contraction from 7.4% to 6.0%.

Despite the company posting an earnings decline over recent years, its PE multiple has expanded. We believe the stock is unlikely to see significant upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, “What Factors Drove 47% Change in United Parcel Service Stock between 2017 and now?“, has the underlying numbers.

UPS’ PE multiple changed from 19x in 2017 to 22x in 2019 based on trailing earnings. While the company’s PE is now at 31x given the recent rally, there is a downside when the current PE is compared to levels seen in the past years, PE of  19x at the end of 2017, and 17x in 2018.

So what’s the likely trigger and can the stock stick to recent gains?

The global spread of coronavirus has led to several restrictions in various cities across the globe, which has affected industrial and economic activity. However, the e-commerce activity has gained traction, as people prefer to stay at home and order goods online. This has aided UPS’ Ground freight volume over the recent months. In fact, the company reported a 25% jump in Ground segment revenues in Q2 2020.  While this trend is expected to continue in the near term, we believe UPS appears to be trading at a high multiple. We estimate 2020 EPS to be around $7.00, and at the current price of $160 a share, UPS is trading at 23x its forward earnings. This compares with trailing PE multiples of 19x in 2017, 17x in 2018, and 22x in 2019. We thus believe UPS to be fully valued at the current levels.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again. As such, the recent gains in the stock may stick, but any significant upside from the current price is unlikely in our view.