Thematic evaluation
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United Parcel Service, Inc. (UPS)

October 10, 2024

Compared to: FedEx Corp. (FDX) | Expeditors International of Washington, Inc. (EXPD) | Industrial Select Sector SPDR Fund (XLI)

Our reasoning

UPS appears moderately undervalued based on its current valuation multiples being below historical and peer averages, despite facing near-term challenges. The company's strong market position, potential for e-commerce growth, and ongoing efficiency initiatives provide upside potential, while macroeconomic headwinds and labor uncertainties are largely priced in.

Key takeaways
  • UPS is facing a challenging market environment, with declining revenue growth and profitability.
  • The company's liquidity position is decreasing, which could be a concern if it limits the company's ability to meet short-term obligations or seize opportunities.
  • UPS is investing in its infrastructure and improving its asset utilization efficiency, which could drive future growth.
  • The company's cash flows from operations are decreasing, but its free cash flow is likely to remain positive, supporting its debt repayment capacity and dividend growth potential.
  • UPS is focused on becoming the premium small package provider, the premium logistics orchestrator, and the #1 complex healthcare logistics provider, which could drive future revenue growth and profitability.
  • The company expects a return to revenue and profit growth in the second half of 2024 as macroeconomic conditions improve and labor cost pressures moderate.
  • UPS's valuation is currently below the industry average, suggesting that the company is undervalued. However, this undervaluation may be due to the company's recent underperformance and the challenges it is facing.
  • UPS's stock price has consistently underperformed the broader industrial sector and its peers, indicating that investors are concerned about the company's future prospects.
Undervalued
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Evaluation summary

  1. Company Overview:

    • UPS is a global leader in package delivery and supply chain management, operating in over 200 countries and territories. Its core business model revolves around providing time-definite delivery services for letters, documents, and packages, leveraging a vast network of ground and air transportation, distribution centers, and technology infrastructure.
    • UPS offers a comprehensive suite of products and services, including transportation and delivery, distribution, contract logistics, ocean freight, airfreight, customs brokerage, and insurance. Its revenue is primarily generated from its U.S. Domestic Package, International Package, and Supply Chain Solutions segments.
    • UPS targets a diverse customer base, including businesses of all sizes, individuals, and government agencies. Its key target markets include e-commerce, healthcare, industrial, and retail sectors.
    • For comparative analysis, we will be using the Industrial Select Sector SPDR Fund (XLI) as a benchmark and FedEx Corp. (FDX) and Expeditors International of Washington, Inc. (EXPD) as industry peers.

  2. Financial Performance:

    • UPS has experienced a decline in revenue growth in recent quarters, indicating a potential slowdown in sales or a challenging market environment. This is likely due to macroeconomic headwinds, including inflation, changes in consumer behavior, and geopolitical tensions, which have weighed on global small package volumes.
    • The company's profitability has also been declining, as evidenced by the decreasing return on assets (ROA), return on equity (ROE), and EBITDA margin. This suggests that UPS is facing challenges in generating profits from its assets and operations, potentially due to increased competition, rising costs, or a shift in product mix.
    • While UPS's ROA, ROE, and ROIC have been declining, they remain above the industry average, indicating that the company is still relatively efficient in utilizing its assets to generate returns. However, the declining trend is a concern and requires further monitoring.
    • Compared to its peers, UPS has consistently underperformed FedEx and Expeditors in terms of both absolute and risk-adjusted returns. While UPS has exhibited lower volatility than FedEx, its maximum drawdown is significantly higher, indicating a higher risk profile. Expeditors has consistently outperformed both UPS and FedEx in terms of risk-adjusted returns.

  3. Operational Efficiency:

    • UPS's balance sheet analysis reveals a stable liquidity position, as evidenced by the current ratio and quick ratio. However, the declining trend in these ratios is a concern, suggesting that the company may have less flexibility in meeting short-term obligations.
    • The company's working capital management appears to be efficient, with a stable working capital balance. However, the declining trend in working capital is a concern, as it may indicate a reduction in short-term assets or an increase in short-term liabilities.
    • UPS's cash flow from operations has been decreasing, which could be due to a decline in profitability or a change in working capital management. However, the company's free cash flow is likely to remain positive, supporting its debt repayment capacity and dividend growth potential.
    • The company's asset quality appears to be improving, as evidenced by the increasing fixed assets and the stable return on assets. This suggests that UPS is effectively using its assets to generate revenue.
    • UPS's free cash flow margin has been declining, which could limit the company's ability to invest in growth or pay down debt. However, the company's free cash flow is still positive, indicating that it has the capacity to meet its financial obligations.
    • UPS's capital expenditure has been increasing, indicating significant investments in long-term assets, such as acquisitions and infrastructure. This suggests that the company is focused on expanding its operations and improving its efficiency.
    • UPS has a history of paying dividends and repurchasing shares, and its dividend and share repurchase sustainability appears to be stable, supported by its positive free cash flow.
    • Compared to its peers, UPS has a lower debt-to-equity ratio and leverage ratio than FedEx, suggesting a more conservative capital structure. However, UPS's debt levels are increasing, which could pose a risk if the company's profitability does not improve.

  4. Growth Opportunities:

    • UPS is focused on expanding its market share in the global small package delivery market, particularly in the e-commerce, healthcare, and industrial sectors. The company is pursuing a strategy of becoming the premium small package provider, the premium logistics orchestrator, and the #1 complex healthcare logistics provider.
    • UPS is actively pursuing M&A opportunities to expand its geographic reach and service offerings. The company recently acquired Estafeta, a leading domestic small package provider in Mexico, and is also exploring opportunities in other emerging markets.
    • UPS is investing heavily in technology and automation to improve its efficiency and customer experience. The company's Digital Access Program has generated significant revenue and is expected to continue to grow in the future.
    • UPS is expanding its healthcare logistics capabilities, leveraging its global network and expertise to provide specialized services for pharmaceutical and medical device companies.
    • UPS is focused on becoming a more sustainable company, investing in alternative fuel vehicles and reducing its carbon footprint.
    • Management has a history of successfully executing strategic plans, as evidenced by the company's consistent growth and profitability over the past several years. However, the company's recent performance has been impacted by macroeconomic headwinds and labor-related uncertainties.

  5. Risks and Threats:

    • UPS faces a number of risks, including changes in general economic conditions, industry competition, and customer relationships. The company's business is sensitive to economic downturns, and a decline in consumer spending or industrial activity could negatively impact its revenue and profitability.
    • UPS is also facing increasing competition from a variety of players, including emerging technologies and business models. The company is actively investing in technology and automation to stay ahead of the competition, but it is unclear whether these investments will be sufficient to maintain its market share.
    • UPS is also facing challenges related to labor shortages and disruptions. The company's recent labor negotiations resulted in significant cost increases, which have impacted its profitability.
    • UPS is subject to a number of regulatory risks, including environmental regulations, data protection laws, and antitrust laws. The company is actively working to comply with these regulations, but it is unclear whether it will be able to avoid significant fines or penalties in the future.

  6. Valuation Analysis:

    • UPS's valuation metrics, such as P/E ratio and EV/EBITDA, are currently below the industry average, suggesting that the company is undervalued. However, this undervaluation may be due to the company's recent underperformance and the challenges it is facing.
    • Compared to its peers, UPS is trading at a lower valuation multiple than FedEx, but at a higher valuation multiple than Expeditors. This suggests that investors may be more optimistic about FedEx's future prospects than UPS's, but less optimistic than Expeditors'.
    • Potential catalysts for UPS's stock price include a return to revenue and profit growth, a successful execution of its strategic initiatives, and a reduction in labor costs.

  7. Price Performance:

    • UPS's stock price has consistently underperformed the Industrial Select Sector SPDR Fund (XLI) over various time periods, including year-to-date, one-year, two-year, and three-year periods. This suggests that UPS has struggled to keep pace with the broader industrial sector, potentially due to factors such as increased competition, rising operating costs, and economic uncertainty.
    • UPS has exhibited higher annualized volatility than XLI, indicating that UPS has been more volatile and risky than XLI, despite offering lower returns. The drawdown figures further support this, with UPS experiencing significantly larger maximum drawdowns than XLI, highlighting its susceptibility to price drops during market downturns.
    • Compared to its peers, UPS has consistently underperformed FedEx and Expeditors in terms of both absolute and risk-adjusted returns. While UPS has exhibited lower volatility than FedEx, its maximum drawdown is significantly higher, indicating a higher risk profile. Expeditors has consistently outperformed both UPS and FedEx in terms of risk-adjusted returns.

  8. Future Outlook:

    • UPS management expects a return to revenue and profit growth in the second half of 2024 as macroeconomic conditions improve and labor cost pressures moderate. However, the company's recent performance has been impacted by macroeconomic headwinds and labor-related uncertainties, and it is unclear whether these factors will abate in the near future.
    • Analyst estimates for UPS's future performance are mixed, with some analysts expecting a rebound in growth and others remaining cautious. The consensus view is that UPS will continue to face challenges in the near term, but that it has the potential to return to growth in the long term.

  9. Summary:

    • UPS is a global leader in package delivery and supply chain management, but it is facing a number of challenges, including macroeconomic headwinds, increased competition, and labor-related uncertainties.
    • The company's financial performance has been declining in recent quarters, but its operational efficiency remains relatively strong.
    • UPS is actively pursuing growth opportunities, including market expansion, M&A, and technology investments.
    • The company faces a number of risks, including economic downturns, competition, labor disruptions, and regulatory changes.
    • UPS's valuation is currently below the industry average, suggesting that the company is undervalued. However, this undervaluation may be due to the company's recent underperformance and the challenges it is facing.
    • UPS's stock price has consistently underperformed the broader industrial sector and its peers, indicating that investors are concerned about the company's future prospects.
    • UPS's future outlook is uncertain, but the company has the potential to return to growth in the long term if it can successfully navigate the challenges it is facing.
    • Overall, UPS is a complex company with both strengths and weaknesses. Investors should carefully consider the company's risks and opportunities before making an investment decision.
Peer fundamentals 
Fundamentals
Insights
  • UPS is facing a challenging market environment, with decreasing revenue growth and profitability.
  • The company is controlling operating expenses, but not as effectively as revenue growth, suggesting that it may need to find ways to further reduce costs or increase revenue to improve profitability.
  • The company's liquidity position is decreasing, which could be a concern if it limits the company's ability to meet short-term obligations or seize opportunities.
  • The company's long-term solvency appears to be stable, but the increasing debt levels could pose a risk if the company's profitability does not improve.
  • The company is investing in its infrastructure and improving its asset utilization efficiency, which could drive future growth.
  • The company's cash flows from operations are decreasing, but its free cash flow is likely to remain positive, supporting its debt repayment capacity and dividend growth potential.
  • The company is focused on becoming the premium small package provider, the premium logistics orchestrator, and the #1 complex healthcare logistics provider, which could drive future revenue growth and profitability.
  • The company expects a return to revenue and profit growth in the second half of 2024 as macroeconomic conditions improve and labor cost pressures moderate.
Analysis
  • Revenue - Revenue growth is decreasing, indicating a potential slowdown in sales or a challenging market environment. - The company is facing macroeconomic headwinds and labor-related uncertainties, which are impacting its revenue growth. - The company is focused on becoming the premium small package provider, the premium logistics orchestrator, and the #1 complex healthcare logistics provider, which could drive future revenue growth.
    • Profitability
      • The company's profitability is decreasing, as evidenced by the declining return on assets, return on equity, and EBITDA margin.
      • The company is facing challenges in generating profits from its assets and operations, which could be due to increased competition, rising costs, or a shift in product mix.
      • The company is controlling operating expenses, but not as effectively as revenue growth, suggesting that it may need to find ways to further reduce costs or increase revenue to improve profitability.
    • Liquidity
      • The company's liquidity position appears to be stable, as evidenced by the current ratio and quick ratio. However, the declining trend in these ratios is a concern.
      • The company's liquidity is below the industry average, suggesting that it may have less flexibility in meeting short-term obligations.
    • Solvency
      • The company's solvency appears to be stable, as evidenced by the stable debt-to-equity ratio and the positive free cash flow. However, the increasing debt levels could pose a risk if the company's profitability does not improve.
      • The company's debt levels are below the industry average, suggesting that it has a more conservative capital structure.
    • Operational Efficiency
      • The company's asset utilization efficiency appears to be improving, as evidenced by the increasing fixed assets and the stable return on assets.
      • The company's efficiency is above the industry average, indicating that it is effectively using its assets to generate revenue.
    • Cash Flow Analysis
      • The company's cash flows from operations are decreasing, which could be due to a decline in profitability or a change in working capital management.
      • The company's cash flows from investing activities are increasing, indicating significant investments in long-term assets, such as acquisitions and infrastructure.
      • The company's cash flows from financing activities are increasing, suggesting a reliance on debt financing or a shift in capital allocation strategy.
      • The company's free cash flow is likely to remain positive, supporting its debt repayment capacity and dividend growth potential.
    • Risk Factors
      • The company's decreasing cash and short-term investments could be a concern if it limits the company's ability to meet short-term obligations or seize opportunities.
      • The increasing debt levels could pose a risk if the company's profitability does not improve.
      • The declining free cash flow margin could limit the company's ability to invest in growth or pay down debt.
    • Future Outlook
      • The company expects a return to revenue and profit growth in the second half of 2024 as macroeconomic conditions improve and labor cost pressures moderate.
      • The company's balance sheet is likely to continue to shift towards a more debt-heavy approach, as it leverages debt for growth and acquisitions.
      • The company's financial flexibility could be impacted by the decreasing cash and short-term investments.
      • The company's cash flows from operations are likely to improve in the second half of 2024 as macroeconomic conditions improve and labor cost pressures moderate.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-09)
Industrial Select Sector SPDR Fund (XLI)
  • Performance Comparison: UPS has consistently underperformed the Industrial Select Sector SPDR Fund (XLI) over various time periods, including year-to-date, one-year, two-year, and three-year periods. This suggests that UPS has struggled to keep pace with the broader industrial sector, potentially due to factors such as increased competition, rising operating costs, and economic uncertainty.
  • Risk and Return Analysis: While UPS has exhibited lower annualized returns than XLI, it has also shown significantly higher annualized volatility. This indicates that UPS has been more volatile and risky than XLI, despite offering lower returns. The drawdown figures further support this, with UPS experiencing significantly larger maximum drawdowns than XLI, highlighting its susceptibility to price drops during market downturns.
  • Risk-Adjusted Performance: The Sharpe ratio analysis reveals that XLI has consistently offered better risk-adjusted returns than UPS. This suggests that XLI has been more efficient in generating returns relative to its risk profile. The beta analysis also indicates that UPS is slightly more sensitive to market movements than XLI, further supporting its higher risk profile.
  • Overall Assessment: The analysis suggests that UPS has been a relatively underperforming and riskier investment compared to the Industrial Select Sector SPDR Fund (XLI). While UPS has exhibited lower returns, it has also shown significantly higher volatility and larger drawdowns, indicating a higher risk profile. The Sharpe ratio and beta analysis further support this conclusion, highlighting XLI's superior risk-adjusted performance and lower sensitivity to market movements. Investors seeking exposure to the industrial sector may consider XLI as a potentially more attractive investment option due to its better risk-adjusted returns and lower volatility.
Peers Price History(as of 2024-10-09)
FedEx Corp. (FDX)Expeditors International of Washington, Inc. (EXPD)
  • Performance Comparison: UPS has consistently underperformed its peer companies, FedEx and Expeditors, over all the listed periods. This underperformance is particularly pronounced over longer periods, such as the 2-year and 3-year periods.
  • Risk and Return Analysis: UPS has provided lower annualized returns than FedEx and Expeditors over all the listed periods. However, UPS has also exhibited lower annualized volatility than FedEx, suggesting that UPS may be less risky than FedEx. UPS's maximum drawdown of 41.65% is significantly higher than FedEx's maximum drawdown of 53.7% and Expeditors' maximum drawdown of 35.62%, indicating that UPS has a higher risk profile than both peer companies.
  • Risk-Adjusted Performance: Expeditors has consistently offered a better risk-adjusted return than UPS and FedEx, as evidenced by its higher Sharpe ratio. UPS's Sharpe ratio has generally been lower than FedEx's, suggesting that UPS's returns have not been as strong relative to its risk.
  • Overall Assessment: UPS has consistently underperformed its peer companies, FedEx and Expeditors, in terms of both absolute and risk-adjusted returns. While UPS has exhibited lower volatility than FedEx, its maximum drawdown is significantly higher, indicating a higher risk profile. Expeditors has consistently outperformed both UPS and FedEx in terms of risk-adjusted returns. Investors seeking higher returns may consider FedEx, while investors seeking lower risk may consider Expeditors. UPS's recent performance and risk profile suggest that it may be a less attractive investment option compared to its peers.
Peers Fundamentals(as of 2024-06-30)
FedEx Corp. (FDX)Expeditors International of Washington, Inc. (EXPD)

  1. Market Position and Size:

    • UPS is the largest company in the peer group, with a market capitalization significantly larger than its peers.
    • This size advantage is reflected in UPS's revenue, which is more than double that of FedEx and more than eight times that of Expeditors.
    • UPS also has the highest EBITDA and net income among its peers, further demonstrating its dominant market position.

  2. Profitability and Efficiency:

    • UPS's profitability metrics are mixed compared to its peers and industry averages.
    • While its Gross Profit Margin is slightly lower than the industry average, its EBITDA Margin, EBIT Margin, and Net Profit Margin are significantly higher, indicating that UPS is more efficient in managing its operating expenses and generating profits.
    • UPS demonstrates strong efficiency in generating returns, with ROA, ROE, ROTC, and ROIC all significantly higher than the industry average, indicating effective utilization of assets and capital.

  3. Financial Health and Stability:

    • UPS's liquidity and debt position are generally healthy compared to its peers and industry averages.
    • Despite its large size, UPS maintains a healthy liquidity position and its debt levels are manageable.

  4. Valuation and Market Perception:

    • UPS's valuation metrics are mixed compared to its peers and industry averages.
    • While its Enterprise Value To Sales and Price To Sales Ratio are slightly higher than the industry average, its Enterprise Value To EBITDA, Price To Earnings, and Price to Book Ratio are lower, suggesting that the market may be valuing UPS at a discount to its peers and industry.

  5. Cash Flow and Capital Management:

    • UPS's cash flow generation is strong compared to its peers, considering its market cap.
    • UPS's strong cash flow generation is a testament to its efficient operations and ability to generate profits.

  6. Growth and Future Prospect:

    • UPS's growth trends are mixed compared to its peer group average.
    • UPS shows consistently lower growth in sales, EBITDA, net income, basic earnings per share, and free cash flow compared to the peer group average.
    • However, UPS shows consistently higher growth in total assets and book value per share compared to the peer group average.
    • UPS's growth rates have been consistently decreasing over the 5-year period for most metrics, indicating a potential slowdown in growth.
    • The most recent year-over-year growth rates are lower than the 5-year CAGRs for most metrics, indicating a deceleration trend.

  7. Potential for Investment:

    • UPS presents a mixed investment proposition.
    • While its strong profitability, efficiency, and cash flow generation make it an attractive investment, its lagging growth in key financial metrics raises concerns about its future prospects.
    • Its valuation is generally in line with its peers and industry averages, but the market may be valuing UPS at a discount due to its slower growth.

  8. Key Risks and Considerations:

    • UPS's slower growth in key financial metrics compared to its peers is a significant risk for investors.
    • UPS's higher debt levels compared to its peers, although still lower than the industry average, could pose a risk if the company faces financial difficulties.
    • The market's perception of UPS as a value stock, with a valuation discount compared to its peers and industry, could limit potential returns for investors.

  9. Overall Assessment:

    • UPS is a financially healthy company with a dominant market position.
    • However, its slower growth in key financial metrics raises concerns about its future prospects.
    • Investors should carefully consider UPS's growth trajectory and its ability to maintain its market share and competitive position before making an investment decision.