Warren Buffett, famously known as the “Oracle of Omaha” and the brains behind Berkshire Hathaway (NYSE:BRK.B), is a legendary investor renowned for his stock-picking prowess. However, one of the stocks in Warren Buffett’s portfolio, United Parcel Service (NYSE:UPS), hasn’t had a smooth ride and is currently trading close to three-year lows, down 35% from its all-time highs. In this article, we’ll explore whether this Warren Buffett-backed stock is worth considering at its current valuation.

United Parcel Service is a logistics heavyweight offering a range of services, from package delivery to transportation and distribution. Over the last three years, UPS has underperformed major equity indices, down by a significant 35% from its peak. So, what’s causing this slump, and does it present an opportunity?

One major factor contributing to UPS’s downturn is its slowing revenue growth. While the S&P 500 Index ($SPX) has surged over 12% year-to-date, UPS shares have slumped by 15.5% in the first 10 months of 2023. The company, which saw a boost during the COVID-19 pandemic, is now grappling with an economy that’s lost some of its vigor, higher debt costs, reduced consumer demand, and elevated inflation rates. Additionally, labor-related issues have been a thorn in UPS’s side, with its new agreement with Teamsters expected to lead to lower shipping volumes and potentially squeeze margins.

In Q3 2023, UPS reported a revenue of $21.1 billion and adjusted earnings of $1.57 per share, surpassing Wall Street’s earnings estimates. However, its sales took a 13% dip, while earnings were down by a substantial 56% year over year. Given UPS’s high fixed-cost structure, a drop in revenue translates to even steeper declines in profit margins.

So, is UPS a compelling buy? Analysts are projecting a 7.6% decline in sales to $92.8 billion and a 28% contraction in adjusted earnings to $9.29 per share in 2023. Currently trading at 1.3 times forward sales and 15 times forward earnings, UPS appears reasonably priced. This discounted valuation may attract investors looking to grab shares of an industry-leading cyclical company, poised to reap substantial rewards once the macroeconomic landscape improves.

Despite its struggles, UPS has more than doubled its net income in the last five years, focusing on serving small and medium-sized businesses, as well as sectors like healthcare. Furthermore, the recent pullback in UPS’s stock has boosted its dividend yield to an enticing 4.56%, making it an attractive choice for income-seeking value investors. In the past decade, the company has consistently increased its dividends by 10.1% annually, reflecting the solid competitive advantage UPS holds.

The sentiment among analysts covering UPS is diverse: nine recommend a “strong buy,” 12 suggest a “hold,” and two propose a “strong sell.” The average price target for UPS stock stands at $175.30, implying a potential upside of 22.7% from its current levels. This suggests there might be light at the end of the tunnel for UPS, making it a stock worth keeping an eye on.

 

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