United Parcel Service: Undervalued Despite Recent Declines

United Parcel Service (UPS) shares have dropped 29.4% this year, leading investors to wonder if it's a bargain. The company has outsourced its weather forecasting and is automating warehouse tasks to cut costs. UPS is undervalued according to 5 out of 6 classic valuation checks, giving it a value score of 5. The DCF model estimates the intrinsic value of UPS shares at $158.67, suggesting the stock is undervalued at its current price of $87.44.

United Parcel Service (UPS) shares have plummeted 29.4% this year, prompting investors to question whether the stock represents a bargain. UPS has been implementing cost-cutting measures, such as outsourcing weather forecasting and automating warehouse tasks, to mitigate the impact of high labor costs and declining parcel volumes. Despite these efforts, the company's financial performance has been lackluster, leading to a significant drop in share price.

Financial Performance and Valuation

UPS' financial performance has been underwhelming due to geopolitical uncertainty, higher inflation, and weak demand. Average daily volumes have declined 3.8% year over year in the first half of 2025, and the company has not provided revenue or operating profit guidance for 2025. The company's valuation is relatively attractive, with a forward 12-month price to earnings (P/E) ratio of 12.32X, lower than its industry average [1].

Impact of De Minimis Exemption Expiry

The expiration of the De Minimis exemption on August 29 has added to UPS' challenges. This exemption allowed packages valued under $800 to enter the United States without additional taxes. The elimination of this exemption has increased the complexity of customs clearance processes and imposed additional tariffs on international shipments. UPS and its rival FedEx have both increased international processing fees in response to this change [1].

Cost-Cutting Measures and Workforce Reduction

UPS has implemented several cost-cutting measures to address its financial woes. The company is offering buyouts to delivery drivers and aims to trim its workforce by 20,000 this year. Additionally, UPS has reached an agreement with Amazon to reduce the latter's volume by more than 50% by June 2026, further contributing to its cost-cutting efforts [1].

Dividend Sustainability

Despite its undervaluation, UPS' elevated dividend payout ratio of 87% raises concerns about the sustainability of its dividends. The company's free cash flow did not cover the dividends paid in the first half of 2025, highlighting the strain on its operational flexibility [1].

Conclusion

While UPS' valuation appears attractive, the company's financial performance and the elimination of the De Minimis exemption have contributed to a significant drop in share price. Investors should exercise caution when considering UPS stock, as the company's ability to maintain its dividend payouts and navigate the challenges posed by the De Minimis exemption expiry remains uncertain.

References:

[1] https://www.nasdaq.com/articles/ups-increases-fees-us-bound-imports-how-play-stock-now
[2] https://www.business-standard.com/world-news/us-ends-low-value-package-tariff-exemption-raising-costs-for-shippers-125082901182_1.html