A Cheap Stock to Buy After Bad News That Really Wasn’t

UPS announced in late January that it will cut back its shipping for Amazon by 50%. The news triggered a selloff in the stock and led us to trim our fair value estimate to $138 per share from $145. Yet despite the news, we see longer-term upside opportunity in the shares, assuming business-to-business package activity recovers and UPS can rationalize network capacity after Amazon-related volume declines. Plus, Amazon’s business is highly dilutive to UPS' domestic margin, so reducing it should lead to margin improvement overall. We think UPS stock looks cheap. It appears on Morningstar’s list of The Best Companies to Own for 2025. It’s also one of chief US market strategist Dave Sekera’s 3 More Stocks to Buy Before They Rebound.

UPS is the giant among global small-parcel delivery companies, and it’s one of three commercial providers that dominate the global landscape, along with FedEx FDX and DHL Express DHL. Despite its unionized workforce, UPS has historically produced operating margins above those of its competitors on average, thanks in large part to its superior package density. Shippers appreciate the convenience of using the same driver to handle express and ground packages in UPS' single network. Favorable e-commerce trends should remain a longer-term top-line tailwind for UPS' US ground and express package businesses. Growth won’t be costless, however. UPS is attempting to mitigate the challenges of painful wage hikes in its latest union contract and a rising proportion of lower-margin business-to-consumer deliveries.

Key Morningstar Metrics for UPS

• Fair Value Estimate: $138
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: Medium

Economic Moat Rating

In our view, UPS’ flagship express and ground package delivery operations enjoy significant and durable competitive advantages rooted in cost advantage and efficient scale. UPS is exceptionally capable of keeping would-be competitors at bay for a prolonged period. Its returns on invested capital have approximated an impressive 20% over the past decade, ahead of its cost of capital. ROICs trended down between 2018 and 2020 due in part to heavy investment spending and soft industrial end markets but rebounded in 2021 on the pandemic-driven surge in package volume and robust pricing conditions. ROICs eased in 2022 and 2023 on normalization for e-commerce activity across the US and Europe, sluggish retailer restocking, muted global trade, and heavy wage inflation. Still, we have very high confidence that excess returns will continue for at least the next 10 years.

Read more about UPS' moat rating.

Fair Value Estimate for UPS Stock

Our $138 fair value estimate incorporates our initial forecasts surrounding the unexpected and upcoming ramp-down in UPS’ package volume from Amazon. In 2025, we expect total revenue to fall 2%-3% as a result of the Amazon decrease. Assuming a stable macroeconomic backdrop in the US and Europe, we expect a partial offset from continued e-commerce growth, modest improvement in US industrial production, a more meaningful uptick in retail sector restocking, and efforts to win new business from small and midsize business accounts. We expect total adjusted margin to rise to 10.8% in 2025 from 9.5% in 2024 and US domestic margin to improve to roughly 8.8% from 7.5%. Over the longer term, we think UPS can generate average top-line growth in the midsingle digits as it capitalizes on incremental e-commerce growth. We bake in a midcycle operating margin near 11.0%, which partly reflects an eventual economic downturn and subsequent recovery.

Read more about UPS' fair value estimate.

Risk and Uncertainty

Broader e-commerce growth should remain a longer-term demand tailwind in UPS' retail end markets. Even so, the cone of uncertainty surrounding our estimates can widen quickly because of macroeconomic factors. UPS derives about a fifth of its revenue from international sources, but it still relies heavily on the health of the US economy in terms of both retail and industrial end markets. UPS' workforce is heavily unionized, which creates the risk of higher-than-expected wage and benefit inflation from labor negotiations and the potential for work stoppages. Amazon’s logistics insourcing efforts could hurt UPS more than FedEx down the road.

Read more about UPS' risk and uncertainty.

UPS Bulls Say

• The company’s US ground and express package delivery operations should enjoy positive longer-term tailwinds from e-commerce growth.
• UPS' massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.
• On top of superior parcel density, UPS uses many of the same assets to handle both express and ground shipments, contributing to industry-leading operating margins.

UPS Bears Say

• Some of UPS' recent domestic package volume gains have come at the cost of strong growth from lower-margin e-commerce customers.
• The company’s national master agreement with the Teamsters is driving significant wage inflation.
• Amazon has materially built out its last-mile logistics capabilities over the past decade, which raises the risk that it will continue to bring in-house more of the last-mile packages it sends via UPS.

This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of Feb. 12, 2025.