United Parcel Service (UPS): A Bull Case Theory

We came across a bullish thesis on United Parcel Service on Pellom Value Investments's Substack by Tyler Pellom. As of 1st July, United Parcel Service's share was trading at $104.74. UPS's trailing and forward P/E were 15.25 and 14.64 respectively according to Yahoo Finance.

United Parcel Service (UPS) has been undergoing a strategic shift under CEO Carol Tomé, dubbed 'Better, Not Bigger', focusing on improving the quality of the business and returns generated, rather than chasing every single package. This approach prioritizes 'economic profitability' and effective capital use, measured by return on invested capital (ROIC). The company is deliberately choosing to grow in higher-yielding segments such as healthcare, business-to-business (B2B), small- and medium-sized businesses (SMBs), and international markets. A significant action tied to this strategy is the reduction in volume delivered for Amazon.com, Inc., which represented approximately 11.8% of UPS's consolidated revenues in 2024. The volume is expected to decline to about 50% of year-end 2024 levels by mid-2026.

The 'Better, Not Bigger' strategy aims to enhance profitability by focusing on higher-margin businesses. Despite a disappointing performance in 2024, with flat revenue and decreased operating profit, UPS is undertaking initiatives to improve efficiency and reduce costs, such as the 'Fit to Serve' program, which resulted in a workforce reduction of 14,000 positions. The company expects revenue to be approximately $89.0 billion in 2025, with an operating margin around 10.8%. The stock has been trading near multi-year lows, with a historically high dividend yield approaching 7%. Valuation multiples are currently below historical averages, presenting a compelling value if the strategic initiatives are successful.

The investment thesis is that UPS is reshaping its business to focus on more profitable volume and improve efficiency, which may lead to long-term benefits not fully reflected in the current stock valuation. With a stable dividend yield above 6% and a goal to buy back $1 billion worth of shares in 2025, modest improvements in EPS or multiple expansion could generate a sufficient return on investment. However, the transition comes with risks, including macroeconomic uncertainties, labor relations, and global trade policies. Despite these challenges, the company's staying power, moat, and operational priorities make the investment attractive at the current valuation.

Previously we covered a bullish thesis on FedEx Corporation by Daan Rijnberk in September 2024, which highlighted the company’s margin expansion, cost-cutting programs like DRIVE and Network 2.0, and undervaluation relative to peers. The company’s stock price has appreciated by approximately 10% since our coverage. This is because the thesis partially played out with ongoing execution on cost savings. Tyler Pellom shares a similar view but emphasizes UPS’s strategic shift toward higher-margin volume and disciplined capital allocation.

UPS isn't on our list of the 30 Most Popular Stocks Among Hedge Funds. While we acknowledge the risk and potential of UPS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an extremely cheap AI stock that is also a major beneficiary of Trump tariffs and onshoring, see our free report on the best short-term AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.