Over the past six months, United Parcel Service’s shares (currently trading at $100.82) have posted a disappointing 18.6% loss, well below the S&P 500’s 5.7% gain. This might have investors contemplating their next move.

Is now the time to buy United Parcel Service, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think United Parcel Service Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in United Parcel Service. Here are three reasons why UPS doesn't excite us and a stock we'd rather own.

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 1.29 billion in the latest quarter, and they averaged 3.9% 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 Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

United Parcel Service’s weak 2.4% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability 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. Unfortunately, United Parcel Service’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

United Parcel Service doesn’t pass our quality test. After the recent drawdown, the stock trades at 13.2× forward P/E (or $100.82 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.

Stocks We Like More Than United Parcel Service

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