Warren Buffett, the chairman and CEO of Berkshire Hathaway (BRK.B), is among the most well-known investors in the world. Also called the “Oracle of Omaha,” Buffett’s investment moves are closely watched due to his ability to pick stocks that outpace the broader markets over time.
But one stock in Warren Buffett’s portfolio has trailed most of the major equity indices over the last three years. That company is United Parcel Services (UPS), which is a logistics giant valued at $119.45 billion by market cap. Down 35% from all-time highs, UPS is currently trading near three-year lows. Let’s see if this Warren Buffett stock is a good buy at the current valuation.
UPS Faces Lower Volumes, Higher Labor Costs
United Parcel Service is a package delivery company that provides transportation and delivery, distribution, contract logistics, ocean freight, air freight, customs brokerage, and insurance services.
UPS shares are down 15.5% in the first 10 months of 2023 - trailing the S&P 500 Index ($SPX) by a wide margin, as the index has surged over 12% year-to-date. One key reason for the downward spiral in UPS is the company’s slowing revenue growth.
UPS and several other logistics companies benefited from the COVID-19 pandemic due to higher delivery volumes and lower interest rates. Today, the company is wrestling with a sluggish economy, higher cost of debt, slowing consumer demand, and elevated inflation levels. Labor issues are also a pain point, with UPS citing its new contract with Teamsters for lower shipping volume - and some margin compression going forward.
During its earnings call for Q4 2022, UPS forecasted revenue between $97 billion and $99.4 billion in 2023, which would indicate a fall of 2% at the midpoint. Following its Q3 results, UPS has now lowered its revenue guidance to between $91.3 billion and $92.3 billion. Its operating margin forecast has also narrowed from 13.1% to 11% in this period, given midpoint estimates.
In Q3 2023, UPS reported revenue of $21.1 billion and adjusted earnings of $1.57 per share. Comparatively, Wall Street forecast Q3 sales at $21.4 billion with earnings of $1.52 per share. While UPS surpassed consensus earnings estimates in Q3, its sales declined by 13% while earnings were down 56% year over year. UPS has a high fixed-cost base, which generally means when top-line declines, profit margins will fall at a faster pace.
Is UPS Stock a Good Value Buy?
Analysts tracking UPS expect its sales to fall by 7.6% year over year to $92.8 billion, while adjusted earnings might narrow by 28% to $9.29 per share in 2023. So, UPS is now priced at 1.3 times forward sales and 15x forward earnings, which is quite reasonable.
The drawdown in valuation allows investors to buy shares of an industry-leading cyclical company at a steep discount and benefit from outsized gains when the macro situation improves. Yes, UPS is struggling to grow its sales and profit margins in 2023; however, its net income has more than doubled in the last five years due to its focus on servicing small and medium businesses and sectors such as healthcare.
Moreover, the pullback in UPS stock has increased its dividend yield to a compelling 4.56%, making it attractive to income-seeking value investors. In the last decade, the company has increased its dividends by 10.1% annually, showcasing the competitive moat UPS enjoys.
Out of the 23 analysts covering UPS, nine recommend “strong buy,” 12 recommend “hold,” and two recommend “strong sell.” The average price target for UPS stock is $175.30, indicating an upside potential of 22.7% from current levels.
