Over the past six months, United Parcel Service’s shares (currently trading at $110) have posted a disappointing 17.5% loss while the S&P 500 was down 1.7%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in United Parcel Service, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even with the cheaper entry price, we're cautious about United Parcel Service. Here are three reasons why you should be careful with UPS and a stock we'd rather own.
Why Do We Think United Parcel Service Will Underperform?
Trademarking its recognizable UPS Brown color, UPS (NYSE: UPS) offers package delivery, supply chain management, and freight forwarding services.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Air Freight and Logistics company because there’s a ceiling to what customers will pay.
United Parcel Service’s units sold came in at 1.62 billion in the latest quarter, and they averaged 4.2% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests United Parcel Service might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
United Parcel Service’s flat EPS over the last five years was below its 4.2% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, United Parcel Service’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of United Parcel Service, we’re out. Following the recent decline, the stock trades at 12.6× forward price-to-earnings (or $110 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
Stocks We Like More Than United Parcel Service
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