Should You Buy United Parcel Service (UPS) Stock While It's Below $193?

UPS (NYSE: UPS), one of the world's top shipping couriers, was once a reliable blue chip stock. Its shares closed at a record high of $192.88 on Feb. 2, 2022 -- marking a 286% gain from its IPO price of $50 in 1999. As of this writing, it trades at approximately $107.

UPS' stock has stumbled over the past four years as its growth has cooled off and its margins have shrunk. Will this out-of-favor stock ever revisit its all-time highs, or will it slide even lower?

Image source: UPS.

What happened to UPS over the past five years?

From 2019 to 2021, UPS' average daily package volume increased from 21.88 million to 25.25 million, and its average revenue per package rose from $10.87 to $12.32. Its total revenue jumped from $74.09 billion to $97.29 billion, its adjusted operating margin expanded from 11% to 13.5%, and its diluted earnings per share (EPS) nearly doubled from $7.53 to $14.68.

That robust growth, which was fueled by surging e-commerce sales throughout the pandemic, propelled UPS' stock to its record high in early 2022. Yet over the following four years, its average daily package volumes declined, its total revenue dropped, its adjusted operating margins contracted, and its diluted EPS plummeted. It partly offset that pressure by raising its fees and reducing its mix of lower-margin orders from its top customer, Amazon (NASDAQ: AMZN), which boosted its average revenue per piece but reduced its total volumes.

Data source: UPS.

UPS' shipments slowed down after the pandemic ended. In 2022 and 2023, rising inflation exacerbated that pressure by curbing consumer spending and boosting its fuel and labor costs. The threat of a strike from the Teamsters Union also prompted many of UPS' customers to shift their deliveries to FedEx (NYSE: FDX) and other courier services to avoid disruptions.

In 2024, UPS signed a new contract with the Teamsters to avoid a strike, and its shipments stabilized in a warmer macro environment. Unfortunately, the higher labor and pension costs guaranteed by that agreement -- along with its divestment of Coyote Logistics, ongoing digital investments, regulatory fines, and some impairment charges -- crushed its margins.

In 2025, its shipments fell again as it continued to reduce its mix of lower-margin orders and decouple itself from Amazon. To cushion that blow, it's trying to gain higher-margin orders from its healthcare and small-to-medium business (SMB) customers. It's also trimming its workforce and automating more tasks, but the competitive pressure from other couriers and its new logistics investments offset those gains, resulting in reduced operating margins throughout 2025.

What's next for UPS?

UPS expected to gradually right-size its business with those strategies in 2025 and 2026. Unfortunately, the Federal Aviation Administration (FAA) grounded all of its MD-11 aircraft (about 9% of its entire fleet) indefinitely after a deadly crash in Louisville, Kentucky, last November.

That grounding, which occurred during its peak holiday season, strained UPS' logistics network and forced it to reroute its deliveries through other types of aircraft, trucks, and partner carriers. That pressure will likely compress its near-term operating margins, but we won't be able to gauge the full impact until it posts its fourth quarter and full-year earnings report on Jan. 27.

For now, analysts expect UPS' revenue and EPS to decline by 3% each in 2025. For 2026, they expect its revenue to roughly flatline as its margin-boosting initiatives boost its EPS by 7%.

That murky outlook suggests UPS isn't out of the woods yet. At $107 per share, it might seem like a bargain at 15 times this year's earnings -- but it also doesn't deserve a higher valuation. UPS isn't down for the count, but its stock won't recover and set fresh highs unless it successfully diversifies its business away from Amazon, expands its higher-margin segments, and resolves all of the logistics issues related to the grounding of its MD-11 aircraft.

Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon and United Parcel Service. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.