Freight Fright: Is UPS Stock a Buy at 52-Week Lows?

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As United Parcel Service (NYSE:UPS) goes, so goes the country? I wouldn’t necessarily consider the shipping giant’s financial health to be a wholly accurate barometer of the nation’s economy. However, there’s merit to the idea that if packages aren’t being shipped out, then the U.S. consumer’s strength should be called into question.

Thus, UPS’ just-released third-quarter earnings results have an extra measure of significance as the all-important holiday season quickly approaches. Even though UPS delivered a package of decent quarterly results, its forward guidance prompted a slew of traders to drop off their shares at the nearest doorstep.

UPS stock slide leads to value-and-yield combo

When a stock goes down a lot, sometimes there are two silver linings. First, the company’s price-to-earnings (P/E) ratio typically goes down if the earnings don’t collapse, so investors may find a good value on the stock. Second, if there’s no dividend cut, then the company’s dividend yield, when expressed as a percentage of the share price rather than as a dollar amount, will likely increase.

Thus, as UPS stock plunges to fresh 52-week lows, at least investors can revel in the company’s seemingly attractive valuation multiple and dividend yield. To put some figures to it, as of Oct. 26, UPS had a GAAP-measured, trailing 12-month (P/E) ratio of 12.72, versus the sector median P/E of 18. Meanwhile, UPS offers a forward annual dividend yield of 4.27%, compared to the industrial goods sector average of 1.639%.

I can already hear the skeptics calling out, “Value trap!” and “Yield trap!” So far in 2023, those have been fair criticisms, as the consolation prizes of an apparently good value and quarterly dividend payments certainly haven’t made up for the share-price depreciation of UPS stock.

In other words, there’s no compelling reason to own UPS stock now unless there are decent turnaround prospects. Thus, we’ll do what we typically do: look to the data for the answers — or at least more informed questions.

UPS meets expectations… more or less

At first glance, there’s really nothing objectionable in the company’s third-quarter 2023 financial results. Starting with the top-line data, UPS generated revenues of $21.1 billion, down 12.8% year over year but nearly in line with Wall Street’s call for $21.4 billion. So far, the company’s results are not great but not terrible.

Moving on to the bottom-line results, UPS reported adjusted diluted earnings per share (EPS) of $1.57, down 47.5% year over year but above the analysts’ consensus estimate of $1.52 per share. Hardly anyone expected UPS to match its results from the year-earlier quarter, so the Street-beating result is a win.

In Q3, UPS had to deal with the usual macroeconomic headwinds (inflation, supply-chain constraints, recession fears, etc.), but there was also a company-specific overhang. Not long ago, UPS forged an agreement with the Teamsters union that gave its package deliverers substantial pay increases.

Prior to that, a shortage of active workers made it challenging for the company to deliver packages in a timely manner. However, CEO Carol Tomé assured investors that UPS is back on track now with a sufficiently prepared workforce.

“Looking ahead, we are well-prepared for the peak holiday season,” she stated.

Is UPS stock a good value investment now?

Investors dumped UPS stock despite the company’s decent quarterly results. This probably occurred because the company’s full-year 2023 revenue guidance of $91.3 billion to $92.3 billion implies soft fourth-quarter revenue. Barron’s calculated the implied Q4 revenue projection at around $25.7 billion, versus Wall Street’s forecast of $26.3 billion.

However, that’s surely been priced in by now. As I see it, the ultra-efficient market envisioned the worst-case scenario for the upcoming holiday season and already punished UPS for its lackluster outlook.

That’s the price of honesty, it seems. On the other hand, I’m starting to get a sense of deja vu. If I recall correctly, jittery investors worried that elevated inflation would crimp holiday shopping activity last year.

Yet, consumers shopped online and ordered plenty of packages in last year’s third quarter. The consumer was “strong,” and the economy didn’t implode. Then the stock market zoomed higher in 2023.

Although UPS stock didn’t zoom higher in 2023, maybe it’s due for a rally this winter. The only thing that’s lower than the UPS share price right now is the market’s expectations of a turnaround for the company. Hence, given enough time and patience, investors might get a special delivery of outsized returns from UPS.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.