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Should You Invest in UPS Stock?

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Should You Invest in UPS Stock?

The package delivery company, UPS, is performing well in challenging market conditions. The company’s stock is garnering significant interest from value investors due to its 4.5% dividend yield, which is appealing to income-focused investors. With potential recovery in the economy and adjustments in the parcel delivery sector, UPS holds promise for future growth. Currently trading around $137, there is a question of whether it is an opportune time for investors to purchase the stock.

Investor Concerns about UPS

Investors showed caution approaching UPS’s third-quarter earnings. The company’s competitor, FedEx, had earlier disappointed the market by lowering its full-year 2025 guidance in a report issued in September, citing weaker than expected market conditions, shifts to lower-margin delivery options, and particular downturns in the business-to-business sector. This raised concerns for UPS, which had also significantly reduced its full-year guidance in July.

Third Quarter Performance of UPS

UPS’s third-quarter market conditions mirrored those reported by FedEx. However, UPS was able to maintain investor confidence by effectively navigating through a tough environment, nearly keeping its full-year operating earnings guidance intact. CEO Carol Tomé commented on the macroeconomic environment, noting it was slightly worse than anticipated, with reductions in manufacturing activity and industrial production. This unfavorable setting continued to impact UPS’s revenue per package negatively.

The company’s U.S. domestic package segment reported a 6.5% increase in volume, yet experienced a 2.2% decrease in average revenue per package, reversing the previous year’s trend. These dynamics resulted in a 5.8% revenue increase, alongside a significant reduction in cost per piece by 4.1% on a non-GAAP basis. Consequently, the non-GAAP operating margin improved to 6.7% from 4.9% year-over-year, with operating profit up 46.5% to $974 million.

Internationally, UPS faced a 0.6% decline in volume but managed to increase average revenue per package by 2.5%, resulting in a 17.3% increase in adjusted operating profit to $792 million.

Implications for Investors

Overall, UPS is navigating a tough trading environment, with volume increases and declines in average revenue per package opposing the company’s "better not bigger" strategy. The company is tackling market conditions by enhancing pricing strategies and reducing costs through workforce cuts, plant rationalizations, and other efficiency improvements.

UPS is also aligning its capacity with market demands, with CEO Tomé acknowledging that a similar capacity rationalization is occurring across the market. This indicates the industry is addressing overcapacity issues, a move that could lead to increased pricing power in the future. Despite a slight reduction in full-year revenue expectations, UPS improved its full-year margin guidance, maintaining its profit outlook similar to that from three months prior.

The company is facing challenges in meeting its full-year targets; however, positive trends in metrics such as CPP, volumes, and margins suggest a potential for enhanced pricing power. Trading at slightly over 18 times full-year earnings estimates, UPS might appear undervalued despite some risks to its full-year outlook. Nonetheless, most performance metrics are on a positive trajectory in the current trading environment.

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