United Parcel Service(NYSE: UPS) shares have lost one-third of their value since early 2022, weighed down by slowing freight volumes and headlines about a massive raise for unionized workers. But an influential Wall Street publication said over the weekend that it is time to buy UPS shares, and investors are reacting.
As a result, shares of UPS were up 3% as of 2 p.m. ET Eastern.
Is the worst over for UPS?
UPS is one of the world's largest shipping companies, but when demand for transportation slows, there is little even the largest players in the industry can do to avoid the cycle. Rising inflation and the Federal Reserve's efforts to tame it have cooled business activity in certain sectors, cutting into shipping volumes.
For UPS, the slowdown came at an inopportune time. Last summer, the company scrambled to reach a last-minute deal with its Teamsters union to avoid a strike. They got a deal, but the cost of the compromise, including an initial 10% wage hike, caught Wall Street by surprises. For a while now, there has been no clear catalyst to cause investors to rush into UPS shares.
Barron's believes now is the time to buy. The closely watched Wall Street publication said over the weekend that UPS's efforts to cut costs, increase automation, and lift volumes should help offset the higher expenses from the labor deal, and can lead to higher margins over time.
Stocks that receive positive mentions in the publication tend to see upside in Monday trading, which is what's happening to UPS today.
Is it time to buy UPS shares?
The long-term argument to buy UPS shares is a solid one. The company expects profitability to increase between now and 2026 as efforts to become more efficient begin to bear fruit, and UPS plays such an important role in global commerce that volumes are bound to return as the economy strengthens.
But the rebound will not happen overnight. Even if the demand has bottomed out for this cycle, it is difficult to argue it will recover quickly. UPS is also dealing with increasing competition from Amazon, which, until the last few years, was one of its top customers.
The stock is not a bargain, trading at 18 times projected 2024 earnings. This is a solid business with a bright future, but investors hoping for a quick surge higher could be in for a disappointment. Barron's enthusiasm is well-founded, but it could prove to be premature.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lou Whiteman has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
