Should You Buy UPS Stock While It's Below $130?

Package delivery giant UPS ' (NYSE: UPS) stock now yields more than 5% and trades almost 46% off its all-time high. Is this a buying opportunity or a value trap for investors interested in the stock?

Here's what you need to know before buying a discounted UPS stock.

UPS looks like a great value

With shares trading at around $128, UPS' price-to-earnings ratio comes in at 17.3 times the Wall Street analyst consensus estimate for 2024 earnings. That's an excellent valuation for a stock that Wall Street analysts believe will grow earnings by almost 20% in 2025. As such, UPS trades on 14.4 times its estimated 2025 earnings. In addition, management's three-year plan, outlined on its investor and analyst day in March, calls for adjusted operating profit to grow by a compound annual growth rate (CAGR) of 13% from 2023 to 2026.

UPS growth plans

Management's three-year plan is attractive because it builds on developing highly successful initiatives. For example, UPS plans to significantly grow its healthcare and small and medium-sized business ( SMB ) revenue as part of its framework, focusing on targeted markets rather than chasing delivery volume per se.

For example, UPS almost doubled its healthcare segment revenue from $5.1 billion in 2016 to $10 billion in 2023. Management plans to develop its cold chain (temperature-controlled storage and deliveries), advanced therapies, diagnostics, and pharma delivery capability to support a doubling of healthcare revenue to $20 billion in 2026.

UPS' highly successful digital access program (DAP) helped it increase its U.S. SMB penetration from 27% in 2021 to 29% in 2023. Management plans to expand it to 40% over time through DAP and other digital capabilities.

Investment in automation and smart facilities should increase productivity, allowing UPS to consolidate facilities and improve productivity. This all adds up to a bright future for the company, and the future arguably starts in the second half of 2024.

Image source: Getty Images.

UPS optics will improve in the second half

The company's earnings are likely to improve in the second half, but not by as much as management told investors on the investor day in March. I'll explain. Going back to the investor day presentation, management laid out a tale of two halves for 2024:

• Adjusted operating profit down 20% to 30% in the first half of 2024 compared to the first half of 2023
• Adjusted operating profit up 20% to 30% in the second half of 2024 compared to the second half of 2024

Management's confidence in a second-half improvement is partly based on U.S. delivery volumes turning positive in the second quarter (they did), and easier cost comparisons with the second half of 2023 because the cost increases associated with a new labor contract began in the third quarter of 2023.

While those assumptions remain, management slashed some of its growth expectations on the Q2 earnings call:

• The original full-year outlook called for revenue of $92 billion to $94.5 billion and adjusted operating margin of 10% to 10.6%, implying a range of adjusted operating profit from $9.2 billion to $10 billion.
• The updated full-year guidance calls for revenue of $93 billion and a margin of 9.4%, implying $8.74 billion in adjusted operating profit.
• The implied adjusted operating profit guidance for the second half is $4.93 billion. Given that it was $4.4 billion in the second half of 2023, this implies a growth rate of 12%, compared to the 20% to 30% discussed on the investor day.

I've previously discussed what's going wrong for UPS in 2024 . To cut a long story short, the company only made its revenue guide for the first half because, according to management on the earnings call, it took on lower-margin deliveries from "new e-commerce entrants into the United States."

Again, this runs contrary to management's "better not bigger" framework and gives UPS an identity problem that it needs to rectify in the coming quarters.

Image source: Getty Images.

Is UPS stock a buy?

The stock looks like a good value. Delivery volumes are improving, the company's long-term plans make sense, and the valuation is attractive. Will UPS stock be higher in a year or so? Probably.

On the other hand, starting a journey on a three-year plan by delivering first-half operating profit growth at the low end of the 20% to 30% decline range, and then updating guidance to imply 12% growth for the second half when the prior guide is 20% to 30%, is not impressive.

UPS is an attractive stock, but don't buy it if you can't handle the potential for near-term risk.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy .