BUY-rated United Parcel Service Inc. (UPS) remains well positioned to benefit from a number of positive trends, including the continued growth of e-commerce. After several years of streamlining, UPS is also poised to leverage what we expect to be solid volume growth in the U.S. domestic market over the medium term, comments John Eade, an analyst with Argus Research.
We are encouraged by the company’s CEO transition, as a well-respected executive from Home Depot (HD), Carol Tome, has now taken over at UPS. We expect her to steer the company through de-globalization, volatile energy and commodity-cost trends, and longer business cycles.
The company has signaled confidence in its outlook with a 7% dividend increase and another share repurchase authorization. On valuation, blending our valuation approaches, and discounting for the impact of higher interest rates on P/E multiples, we arrive at a revised 12-month target price of $210, or 16-times estimated 2024 profits, which is the midpoint of the stock’s historical valuation range.
UPS shares have outperformed the S&P 500 over the past quarter, gaining 11% while the broad market has risen 5%. Over the past year, the shares have also outperformed, dropping 7% versus a 9% decline for the S&P 500. UPS has underperformed the industry ETF iShares U.S. Industrials ETF (IYJ) over the past year but has outperformed over the past five years.
In other news, UPS shares rose 4.5% on January 31 after the company reported 4Q earnings that were flat year-over-year and topped consensus expectations. For the quarter, UPS reported that revenue declined 3% year-over-year on an organic basis to $27 billion. Adjusted operating income also declined 3%, as the operating margin narrowed by 10 basis points to 14.1%. Adjusted EPS came to $3.62. The consensus had called for $3.59.
Meanwhile, the company continues to innovate, and we expect innovations to accelerate under Ms. Tome. In her first earnings report with UPS, she stated that the company had five core principles underpinning its actions:
- UPS values
- The dividend
- A strong investment-grade credit rating
- Brand relevance
- Employee ownership
Everything else was up for review, she said. Our recommendation is BUY.
