Why UPS Is a Good Value Stock to Buy

It’s been a somewhat confusing year for UPS (UPS 0.34%) investors. As I write, the stock is down 16.4% for the year and has slightly underperformed the S&P 500 index. However, this comes in a year when the company pulled its 2023 guidance forward by a year on its fourth-quarter 2021 earnings in early February. Moreover, despite facing headwinds in the first quarter, management reaffirmed its full-year 2022 guidance in April. So what’s going on, and is the stock a good value now?

UPS reaffirms guidance

First up, here’s a reminder of management’s guidance compared to 2021 and what management outlined for 2023 at its investor day event in June 2020. As you can see below, overall revenue, operating profit, and operating margin are all due to come in a year ahead of schedule. So that’s the good news.

However, some naysayers will be quick to point out that UPS’ latest guidance is exactly what its management gave a few months ago in early February. Meanwhile, there are signs of weakness in the economy, and management’s concession that U.S. domestic and international volumes came in weaker than expected in the first quarter will concern investors. Moreover, management also said volumes in the U.S. domestic and international would come in lower than previously expected for the full year.

That said, I have three reasons why the naysayers are wrong.

Data source: UPS presentations. Notes by author.

A better value stock

First, the company is still on track to get to its 2023 targets a year early, but its valuation is a lot less due to the fall in the stock price. Based on the Wall Street analyst consensus estimate of $12.75 in earnings per share for 2022, at a price of $174, UPS trades on less than 14 times forward earnings. Meanwhile, the stock yields a handsome 3.5%.

To put these figures into context, after the first-quarter earnings, UPS traded on $230, putting it on a forward price-to-earnings (P/E) ratio of 18 times and a dividend yield of 2.6%.

Granted, the rest of the market has fallen since then, so on a relative valuation basis, UPS should get cheaper too. Still, UPS’ dividend yield of 3.6% is notably above the 10-year U.S. Treasury yield of 2.78%, and there’s plenty of growth potential in UPS’ dividend.

The volume declines may be caused by temporary factors

Second, as noted above and displayed below, volumes declined in both the major segments and management acknowledged they would come in lower than expected for 2022. That’s disappointing; however, UPS more than offset the volume decline through price increases, even if they were forced due to increased fuel surcharges. The bottom line is that revenue still grew.

Third, the reasons for the volume declines may prove temporary. For example, CEO Carol Tome noted that UPS came up against a difficult comparison with the previous year due to the stimulus checks falling in the first quarter of 2021. However, during the earnings call, she told investors that “Our April volume is better than our March volume. So we’re trending in the right direction.” Furthermore, she said UPS customers (primarily responsible for the volume shortfall) had said “it was just too hard to comp those stimulus checks.” Bearing in mind that Tome was a longtime CFO at The Home Depot, it’s fair to say her word counts more than most on U.S. consumer spending.

As for the international segment, CFO Brian Newman said of the volume shortfall, “It really was because of the COVID rolling lockdowns in Asia.” Hopefully, that’s a situation that will be alleviated in the coming months.

Data source: UPS presentations.

Looking ahead

The reasons for the volume shortfalls will hopefully prove temporary for the transportation stock, and in any case, UPS is offsetting them with price increases. However, if the prices stick and volume growth comes back, it could lead to UPS upgrading earnings estimates later in the year. That said, economic growth is slowing, and there’s no shortage of geopolitical risk to the economy right now. So it’s probably safer to assume UPS will stand still on its earnings guidance in 2022, and on a forward P/E ratio of fewer than 14 times, that’s good enough for most investors.