United Parcel Service (NYSE:UPS) stock looks like a bargain at these prices. The stock has fallen approximately 40% from its peak in November 2019 when it was in the mid-$120 range. Today it is in the low $90-per-share range.
In fact, in the last two weeks, UPS stock has fallen over 15% from $106.49. The interesting thing is that there is no way that the true value of UPS as a company has fallen anywhere near that level.
All About the Coronavirus
Granted, the company’s outlook is lower thanks to the coronavirus from China. The outbreak has had quite the impact on first-quarter economic activity in the U.S. and abroad.
On Feb. 24, 2020, UPS CEO David Abney talked with Bloomberg News about the effect this will have on its international operations. He said that the company’s planes are less full coming out of China. However, he did not assess what impact the lower trade levels will have on UPS’s earnings.
In 2019 international package delivery accounted for $14.2 billion of UPS’s $74.1 billion in revenue or 19.2%, according to its 10-K filing. Over half of that was from Europe. However, 34% of UPS’s operating profits came from international delivery.
So any kind of downturn in international trade will have a large effect on the company’s operating profits.
Effect on the UPS Stock Valuation
Last year UPS made $4.4 billion in net income or $5.11 per diluted share. It also paid out $3.84 per share in dividends. Moreover, analysts at Seeking Alpha are forecasting that UPS will make $7.88 in 2020.
So based on these numbers UPS stock, at a $90.49 closing price, is trading for just 11.4 times expected earnings. In addition, the dividend per share was just set 5.2% higher at $4.04 per share. That sets the going forward dividend yield at 4.5%.
If the international profits are much lower due to the coronavirus, that will decrease overall profits. I estimate this will cut profits by as much as one-third of the 34% that international represents of total revenue. That would hurt profits by up to 11%.
So we might estimate that instead of $7.88 in earnings per share, the revised number might be more like $6.80 to $6.90. To be even more conservative, let’s assume the new number is $6 per share.
That still makes UPS stock very cheap. The revised price-earnings ratio for 2020 is 15 times ($91 price divided by $6 earnings per share). That number is well below the market index averages and is still quite cheap.
What Should Investors Do With UPS Stock?
Unless you believe there is going to be a large global recession, UPS stock looks attractive. Its present price already discounts a lot of bad news.
In the meantime, by owning UPS stock you receive a very nice dividend of 4.5%. This allows you to make money while waiting for the stock to recover.
Therefore, this looks like a good investment for long-term investors that are willing to take a positive view on the company’s excellent growth.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.
