Just in time for Christmas — and for the second time in a week — analysts are raising price targets on United Parcel Services (UPS 3.61%) stock, which enjoyed a modest 2.7% bump in share price through 11 a.m. ET this morning.
Last week saw Bank of America raise its target on UPS to $164 per share. Today, investment bank Oppenheimer is going BofA four better, raising its price target to $168 per share, as The Fly just reported. What’s more, whereas BofA assigns UPS stock only a “neutral” rating, Oppenheimer thinks the stock will “outperform.”
Two views on UPS
UPS has apparently been making the rounds on Wall Street lately, with both investment banks citing separate “investor meetings” with the company as prompting their price target revisions.
Last week, BofA’s takeaway from its meeting is that UPS is off to a “solid” start to peak shipping season this year — but that UPS seems to be trending toward the low end of its forecasted 3% to 8% volume growth in Q4 2023. The banker responded by cutting its calculate of earnings growth at UPS by 2% in both 2023 and 2024, raising its price target but keeping its rating at neutral.
Oppenheimer is a bit more optimistic, thinking that UPS is both increasing shipping volumes and also winning back customers it lost during the period of uncertainty when UPS was negotiating with its union, and the Teamsters were threatening to strike. (This process ended in July, with a new contract being signed shortly thereafter.) The analyst added that it sees UPS making progress on optimizing “network flow” and cutting costs, which might help to stabilize the company’s profit margin.
Is UPS stock a buy?
It remains to be seen how big those margin improvements will be, however, or whether they will be good enough to defend UPS’s current valuation of 16 times earnings, as well as earnings trending lower.
On the plus side, 3% or 4% volume growth, plus a dividend yield of 4.1%, get UPS about halfway to justifying the stock’s modest 16x P/E ratio. That being said, profit margins are wrapping up their second straight year of post-pandemic declines, yet still have a ways to fall if they’re going to return to pre-pandemic levels. In 2019, for example, UPS scored a 6% net profit margin, which more than doubled to 13% in 2021, and has only fallen back to about 9% at last report, according to data from S&P Global Market Intelligence.
Falling margins mean that 2023 will probably mark a near-term nadir in UPS’s profits — as much as 36% below 2022 levels. Granted, higher revenue growth may counteract weak margins going forward. But even so, most analysts don’t see UPS returning to 2022 levels of profitability until 2028 at the earliest.
Long story short: Valuing UPS stock on a level of earnings that it’s unlikely to be “earning” again for several years is a strategy likely to turn the stock into a value trap for investors. UPS stock looks cheap for a reason right now and may not be safe to buy.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
