UPS Downgraded to Strong Sell
Difficult times often separate the best-run companies from those with mediocre management teams. Since 2019, UPS (NYSE: UPS) has struggled with inflation, rising costs, and global conflicts. The data shows UPS has underperformed the market, declining 10.44% since May 2021, while the S&P 500 has gained 25.75%.
Management’s Weak Guidance
Management has not demonstrated a clear plan for meaningful growth in the current operating environment. The company’s recent earnings report revealed guidance for nearly no revenue growth this year and expects revenues to remain flat at $92-$94 billion. This is despite the company’s aggressive capital expenditure plans of $4.5 billion this year.
Declining Shipping Volumes and Revenues
UPS has been significantly impacted by the slowdown in e-commerce since 2021. The carrier’s average daily volume fell by 3.2% in the recent quarter, while average revenue per piece declined by 0.3% year-over-year. Despite its heavy spending, management has not been successful in finding alternative revenue streams.
Competition and Labor Costs
UPS faces intense competition in the healthcare logistics segment from Amazon, which offers delivery in all 50 states through Amazon Clinic. The company also expects labor costs to rise 9% this year, further pressuring its margins.
Overvaluation and Declining Margins
Despite its declining revenues and earnings, UPS trades at a high multiple of 17.93x expected forward GAAP earnings and 15x predicted forward EBIT. The company’s operating adjusted margins have compressed to 8% in the first quarter, down from 11% last year.
Earnings Decline and Analyst Outlook
UPS’s earnings per share have been declining over the last three years. Analysts predict only 4-5% revenue growth for UPS over the next several years, which is not commensurate with its current valuation.
Conclusion
Recessions and inflationary periods expose management weaknesses. UPS’s management team has failed to drive any meaningful growth in the last several years. Given the company’s slowing revenue, declining EPS, and overvaluation, UPS should be trading at a lower multiple of 12-14x expected forward earnings. Investors should consider alternative investments with better value and growth potential.
