Investing is more about where a stock goes than where it comes from. Additionally, if you could see a snapshot of what it would look like in a year and try to guess what valuation it might be trading at, you could come up with an estimate of the type of return you would get from investing in a could be stock-like UPS (UPS 0.78%). With that in mind, here’s a look at what UPS could look like a year from now.
The difficult year 2023 for UPS
These have been unusual years for the company. As mentioned, management set its 2023 revenue, operating margin, and operating profit targets in June 2021 and hit them on time a year early in 2022. So far, so good, and for 2023, investors had reason to believe that The company would significantly exceed its goals for 2023 2023.
Unfortunately that didn’t happen. What did This is a combination of three factors that caused the company to significantly miss the forecasts made at the beginning of the year. For reference, management at the start of the year forecast full-year revenue of $97 billion to $99.4 billion and an adjusted operating profit margin of 12.8% to 13.6%. Let’s look at the third quarter earnings report at the end of October. Management now expects revenue of $91.3 billion to $92.3 billion and an adjusted operating margin of 10.8% to 11.3%.
The three factors are:
- Rising interest rates slowed the economy, reduced package delivery volumes and caused customers to switch to cheaper delivery options.
- A natural correction towards consumer spending on services and experiences rather than products, as the former boomed due to the lockdown measures of previous years.
- Protracted collective bargaining with the Teamsters and fear of strikes led customers to shift deliveries to other networks.
Why UPS will recover in 2024
The good news is that these three factors are likely to correct in 2024. Although it is difficult to predict the direction of the economy, history suggests that interest rates will fall. In fact, the fact that the market prices a lower interest rate on a one-year Treasury note than on a six-month Treasury note suggests that interest rates could be lower a year from now.
With the desire to learn about travel and hospitality experiences now satisfied, it is likely that consumers will shift to spending more on products in 2024.
After all, UPS is already regaining the volumes lost through collective bargaining. For example, management assumes that an average of 1.5 million packages per day were lost in the third quarter due to volume diversion. Still, by the end of October it had regained 600,000.
Where will UPS be in 2024?
Everything points to a recovery for UPS in 2024, and it’s also worth noting that the company continues to make great progress in growing its business in select end markets such as healthcare and small and medium-sized businesses (SMBs). In fact, despite weak end-market conditions in 2023, UPS is still on track to meet its operating target of $10 billion in healthcare sales and $3 billion in sales related to its SMB-focused Digital Access Program (DAP). to achieve this year.
The growing relationships in healthcare and SMBs and the decline in less profitable deliveries for customers like Amazon.com will only improve UPS’s earnings quality in the long term. Additionally, UPS continues to invest in productivity-enhancing technology solutions such as automation and intelligent equipment that help reduce unit costs.
Is UPS Stock a Buy?
Wall Street analysts also believe UPS will have a better year in 2024, and the consensus expects UPS’s earnings per share (EPS) to rise from $8.83 in 2023 to 9.72 US dollar will rise in 2024. Based on the current price of $156, UPS would be at 16 times 2024 earnings. That’s a good valuation considering analysts don’t expect UPS’s year-over-year earnings to improve until the third quarter of 2024 will improve.
In other words, the first two quarters of 2024 will continue to be difficult as earnings decline due to a weak economy and continue to recover from the Teamsters negotiations. All in all, it will take time for UPS to recover. Still, at the end of the year, UPS should look like a company that is back in growth mode and has the potential for long-term margin expansion, and it is unlikely that the company will still trade at 16 times earnings with this profile.
Therefore, there’s a good chance that UPS stock will be significantly higher this time next year.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions on Amazon and recommends them. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.