Why UPS stock exploded on Thursday

For the second time in a week over Christmas, analysts have raised their price targets. united parcel service (UPS 3.52%) As of 11 a.m. ET this morning, the stock was up a modest 2.7%.

saw last week bank of america UPS raised its target to $164 per share. Today is an investment bank Oppenheimer BofA will be 4x better. that The target is $168 per share, as The Fly just reported. Moreover, BofA only gives UPS stock a “neutral” rating, while Oppenheimer thinks the stock “will outperform.”

Two views on UPS

UPS appears to have been making the rounds on Wall Street recently, with both investment banks calling for price target revisions in separate “investor meetings” with the company.

BofA’s takeaway from last week’s meeting was that UPS is off to a “solid” start to this year’s peak season. But UPS appears to be heading toward the bottom of the 3% to 8% volume growth it forecast for the fourth quarter. 2023. The banker responded by lowering UPS’s earnings growth estimates by 2% for both 2023 and 2024 and raising its price target while keeping the rating at Neutral.

Oppenheimer is more optimistic, saying he believes UPS is increasing its delivery volume and winning back customers it lost during a period of uncertainty during which UPS negotiated with unions and the Teamsters threatened a strike. (The process ended in July, and a new contract was signed shortly thereafter.) Analysts say UPS is making progress optimizing “network flows” and reducing costs, which will help stabilize the company’s profit margins. He added that it could be possible.

Is UPS stock a buy?

However, it is not yet known how large this margin improvement will be, or whether it will be good enough to justify UPS’s current valuation of 16 times earnings and its downward trend.

On the plus side, 3% or 4% volume growth plus a 4.1% dividend yield puts UPS nearly halfway to justifying the stock’s modest 16x P/E ratio. That said, profit margins are ending a two-year straight post-pandemic decline, but could still fall to return to pre-pandemic levels. For example, UPS’s net profit margin was 6% in 2019, more than doubling to 13% in 2021 and down to about 9% in the last report, according to data from S&P Global Market Intelligence.

Falling margins mean 2023 will be the near-term low point for UPS revenue (up to 36% below 2022 levels). Of course, higher revenue growth could offset weaker margins going forward. But despite that, most analysts don’t think UPS will return to 2022 levels of profitability until 2028 at the earliest.

Simply put, valuing UPS stock at an earnings level that likely won’t be “profitable” again for several years is a strategy that has the potential to make the stock a value trap for investors. UPS stock looks cheap right now and may not be safe to buy.