UPS (NYSE: UPS) reported its Q3 results last week, with revenues missing but earnings beating the street estimates, and we believe that UPS stock has room for growth, as discussed below. The company reported revenue of $21.1 billion and adjusted earnings of $1.57 per share compared to the consensus estimates of $21.5 billion and $1.52, respectively. In this note, we discuss UPS’ stock performance, key takeaways from its recent results, and valuation.
UPS stock has seen a decline of 20% from levels of $170 in early January 2021 to around $140 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the decrease in UPS stock has been far from consistent. Returns for the stock were 27% in 2021, -19% in 2022, and -18% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 13% in 2023 (YTD) – indicating that UPS underperformed the S&P in 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Industrials sector, including UNP, HON, and CAT, and even for the megacap stars GOOG, TSLA, and MSFT.
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In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UPS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, UPS stock looks like it has room for growth. We estimate UPS’ Valuation to be $173 per share, reflecting over 20% upside from its current levels of $142. Our forecast is based on a 19x P/E multiple for UPS and expected earnings of $8.90 on a per-share and adjusted basis for the full year 2023.
UPS revenue of $21.1 billion in Q3 was down 13% y-o-y, and the company stated that challenging macroeconomic conditions weighed on the overall demand, along with the impact of labor deal with the Teamsters Union that was ratified in August. The labor deal is also impacting the operating margin for now. However, there are positives to look forward to. Firstly, the company’s management stated that the volume impact from labor negotiations is now returning. Secondly, the company should be able to pass on higher costs to the customers, and the margin profile will likely improve in 2024 from the projected 10.8% to 11.3% range for 2023. UPS reported $1.57 adjusted earnings per share in Q3, reflecting a 47% y-o-y decline.
The near-term challenges remain with higher costs and an uncertain macroeconomic environment likely weighing on the overall top and bottom line growth in Q4. UPS lowered its 2023 revenue forecast to be in the range of $91.3 billion and $92.3 billion, compared to its previous projection of $93 billion.
|S&P 500 Return||3%||12%||93%|
|Trefis Reinforced Value Portfolio||3%||21%||520%|
 Month-to-date and year-to-date as of 11/3/2023
 Cumulative total returns since the end of 2016