United Parcel Services (UPS) stock has underperformed most of its rivals in the past few years, as its growth momentum has faded. It has dropped by over 13% this year while FedEx, its biggest rival, has risen by over 5.21%.
Its underperformance goes way back, as it rose by just 12% in the past five years while FedEx has jumped by over 85%.
UPS growth has stalled
UPS is a large company used by millions of customers every month. In 2023, the company delivered parcels to over 10.2 million customers, a number that will likely continue growing in the foreseeable future.
Its strength is that it has over 500k employees, hundreds of planes, and thousands of vehicles, which ensure that parcels are delivered within a short period.
The company has gone through a rough past few years as its volumes, revenues, and operating profits dropped. This decline was mostly because of external factors like high interest rates and supply chain issues.
Additionally, competition in the shipping industry has continued rising. Most of this competition is coming from traditional companies like FedEx and Deutsche Post. Also, newer players in the delivery industry like Amazon, Instacart, Uber, and Postmates has affected its business.
It also saw higher operating costs because of energy and higher wages. Earlier this year, the company said that it would lay off over 12,000 management jobs. It then continued with these cuts last month.
A quick look at its earnings trends in the past few years shows why this has happened. Its total revenue was $74 billion in 2019, a figure that rose to $100 billion in 2022. It then dropped to $90 bilion in the last financial year
UPS slowing revenue growth
The most recent financial results showed that its business continued to deteriorate last quarter. Revenue dropped by 1.1% to over $21.8 billion while its operating profit plunged by 30% to $1.9 billion.
This slowdown was across its two segments. Its US domestic revenue dropped by 1,9% to $14.1 billion while its international segment’s figure fell from $4.4 billion to $4.37 billion.
The company’s forward guidance was also weaker than expected. It expects that its full-year revenue will be $93 billion, lower than the analysts’ estimates of $94 billion. Analyst also expect that its revenue will hit $96 billion in 2025.
Catalysts for UPS stock
Still, there are a few catalysts that could push the UPS stock price upwards in the future. First, there are signs that its revenue growth will bounce back. It made $90 billion in 2023 and now estimates that it will make $92 billion this year. Analyst see its revenue rising to $96 billion next year.
Second, the ongoing stock weakness has made it more attractive to income investors, who love its 5% dividend yield, which is higher than FedEx’s 2%. With interest rates starting to come down, income-focused investors will embrace blue-chips like UPS.
UBS has a good record of growing its dividend. It has grown them for 14 consecutive years, and has had a compounded annual growth rate of 11.4% in the last five years.
Third, the company’s business will likely benefit from the ongoing interest rate cycle by the Fed and other central banks.
FedEx is a better stock
Still, we believe that FedEx is a better stock to watch in the near term. While its stock has done well in the past few years, it is still undervalued. FedEx has a trailing twelve months P/E ratio of 16 compared to UPS’s 21. Its forward P/E multiple of 13.28 is also lower than UPS’s 17.5.
Also, FedEx has better forward growth multiples. It has a forward revenue growth of minus 1.1% compared to UPS’s 6.94%. Its forward EV to EBITDA multiple of 8% is also higher than UPS’s minus 6.43%.
Additionally, FedEx has a lower dividend payout ratio of 31%, which is much lower than UPS’s 89%. A payout ratio refers to the ratio of cash that a company pays dividend from its free cash flow. A lower number means that the company has room to grow its payouts in the future.
UPS stock price analysis
UPS chart by TradingView
The daily chart shows that the UPS share price has underperformed the market this year. It has remained below the 50-day and 200-day moving averages, meaning that bears are in control.
The stock has also formed a bearish flag chart pattern, which is often a bearish sign. On the positive side, it has formed a bullish divergence pattern as the MACD indicator has crossed the neutral point.
Therefore, the stock will likely have a bearish breakout, with the next point to watch being at $121.56, its lowest point in September.
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