United Parcel Service (NYSE: UPS) is going through a significant transformation. While Wall Street has expressed skepticism about its turnaround effort, the latter half of 2024 saw UPS start to regain momentum. However, the announcement of a major shift in its relationship with Amazon, its largest customer, triggered investor disappointment once again. Here are three compelling reasons why now may be a good time to invest in UPS.
1. UPS Offers Attractive Pricing
UPS stock is currently trading close to its 52-week lows, down about 20% for the year. The shares have lost half their value since peaking in early 2022, placing the company in a somewhat unloved position. Notably, the dividend yield has climbed to 4.8%, which is among the highest in the company’s history. Remarkably, this yield is higher now than during the Great Recession, a time when many feared a global financial collapse. Given these factors, the stock indeed appears deeply undervalued.
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A closer look at traditional valuation metrics reveals that UPS’s price-to-sales, price-to-earnings, and price-to-book value ratios are currently below their five-year averages. While there are valid reasons for the company’s struggles, such as weak operating performance, management is actively addressing these issues. In the latter half of 2024, key performance indicators began showing signs of improvement. During the third quarter, CEO Carol Tome proudly reported that UPS had “returned to revenue and profit growth.” This statement confirmed that the company had finally turned a corner, with continued positive performance into the fourth quarter.
While UPS may seem out of favor now, it is strategically positioned for growth rather than decline. This provides an opportunity for investors to discern good news within the challenges highlighted in the fourth quarter announcement.
2. UPS Has a Unique Business Model
It’s essential to recognize that UPS is a logistics powerhouse. The company operates a well-orchestrated network of brown-clad employees and trucks, ensuring quick and cost-effective package delivery across various locations.
The scope of UPS’s operations extends beyond just its delivery vehicles and personnel. The company boasts sorting facilities, airplanes, and extensive retail locations that create a business reach difficult for competitors to replicate. Even Amazon (NASDAQ: AMZN) has yet to completely match UPS’s capabilities.
Other major competitors include the U.S. Postal Service, Deutsche Post (owner of DHL), and FedEx, which emphasizes overnight deliveries. Although some European competitors have attempted to break into the U.S. market, their efforts have not been as successful as anticipated.
While disruptions in UPS’s business model are possible, the company maintains a strong market position. Given its recent performance upswing, it seems well-equipped to navigate Wall Street’s present uncertainties.
UPS data by YCharts.
3. Wall Street Reacts to Amazon Announcement
Despite improving performance and a solid market position, UPS’s stock remains undervalued. The recent Q4 2024 earnings report triggered a sharp decline in stock value due to an announcement about scaling back its partnership with Amazon. UPS indicated that its business with Amazon is expected to drop by 50%!
Instead of fearing this decision, it’s crucial to understand the rationale behind it. Management clearly believes that it has made substantial progress with the company. By focusing on higher-margin operations and stepping away from Amazon’s high-volume, low-margin business, UPS is making a strategic shift. Historically, this type of move may benefit long-term stability.
Although this decision may impact short-term profits, it allows UPS’s higher-margin divisions—particularly growing sectors like healthcare—to be highlighted. This refocus on profitability signifies an upgrade to the company’s business structure—an encouraging sign for long-term investors.
UPS data by YCharts.
Consider Buying UPS Stock
The turnaround at UPS remains a work in progress, which may not appeal to risk-averse investors. However, for those who are interested in turnaround stories or high-yield opportunities, now could be the right time to examine UPS. Delaying action may cause potential investors to miss a valuable opportunity. The stock’s attractive valuation and yield, combined with UPS’s strategy of making challenging yet necessary decisions, position the company well for future growth.
Should You Invest $1,000 in United Parcel Service Right Now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board. Reuben Gregg Brewer does not hold positions in any of the mentioned stocks. The Motley Fool holds positions in and recommends Amazon and FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
