UPS stocks were sapped this week. Here’s why it’s a buy now.
United parcel service
the stock is still a buy, even after the disappointing investor event last week. The world is a very different place than it was a few years ago. This should help the business of the company and its price / earnings ratio.
UPS (ticker: UPS) met with investors on Wednesday. The expectations were high. Shares are up 25% for 2021 and 90% in the past 12 months. UPS hasn’t lived up to them, however. Investors wanted more aggressive cost cuts, earnings growth projections and stock buyback plans. Shares fell 4.1% on Wednesday and are down 3.5% for the week.
Investors are a bit too short-term focused. Over the past three years, the shipping giant’s operating margins have plummeted. This limited its profit growth to around 5% per year on average. Shipping packages was a tough business.
But on the way out of Covid-19, prices are strong, online shopping has exploded and new business opportunities are emerging, such as temperature-controlled shipping for the healthcare sector. The company expects profit margins to increase over the next three years, resulting in profit growth of around 15% per year on average.
Higher growth should ultimately be rewarded with higher stock valuations.
In recent years, UPS stock has traded at around 17 times the estimated earrings, a 16% discount from the
multiple of about 20 times. A lower multiple seemed appropriate, as UPS profits were not growing as fast as the market.
Today, UPS stock is trading at around 18.5 times earnings. That’s a 17% discount from the current market multiple of around 22 times. Shipping is better and earnings growth is expected to accelerate, but investors are paying less for UPS earnings, compared to the S&P 500, than in the recent past.
Something is wrong. The UPS stock deserves, at least, a P / E ratio close to the market. That would mean the stock, now at $ 203.20, could trade around $ 290 in two years, based on management’s earnings projections. This implies an increase of around 43%.
When Barron chose UPS stock in May 2019, we called it an undervalued buy. The shares have since doubled. They don’t look dumped anymore. But the P / E ratio of the stock can increase further. The actions do not reflect all of the changes in shipping and supply chains necessitated by Covid-19.
At least one analyst seems to agree. at JP Morgan Brian Ossenbeck upgraded UPS shares to Buy from Hold on Thursday, following UPS Investor Day. Its price target rose from $ 224 to $ 243, or roughly 22 times its estimated profit of $ 11 per share in 2021. That’s in line with the larger market.
With the investor event in the rear view mirror, Ossenbeck believes investors will begin to focus on growth and pricing power. We agree.
Write to Al Root at [email protected]