Is UPS Stock a Hidden Gem? Assessing Undervaluation Amid Restructuring and Growth Catalysts

In the face of macroeconomic headwinds and investor skepticism, UPS (NYSE:UPS) has been navigating a complex landscape of cost-cutting, restructuring, and segment-specific challenges. At a glance, its stock price of $135.18 may not scream opportunity, but beneath the surface, there's a compelling case for why the company could be undervalued—and why catalysts are in place for a potential rebound. Let's dissect the numbers.

The Mixed Q1 Earnings Picture

UPS reported first-quarter 2025 results showing a 0.7% revenue decline to $21.5 billion, dragged down by its Supply Chain Solutions segment (down 14.8% due to the Coyote Logistics divestiture). However, operating profit rose 3.3% to $1.7 billion, and adjusted EPS increased 4.2% to $1.49. The company also highlighted margin improvements in its core U.S. Domestic and International segments, with the former's revenue per piece up 4.5% and the latter's volume rising 7.1%.

These results suggest a strategic shift: UPS is prioritizing profitability over top-line growth. But investors have been skeptical. The stock is down 0.49% on the day, and the trailing P/E of 22.05 sits above the broader market average. Is this pessimism misplaced?

The Case for Undervaluation

The key lies in forward-looking metrics. Analysts project EPS growth of 18.84% for 2025, lifting estimates from $7.43 to $8.83. This growth could meaningfully compress the forward P/E of 18.19, which already appears reasonable compared to historical averages. Meanwhile, the PEG ratio of 1.98 may seem elevated, but it hinges on the execution of UPS's transformation plans.

Consider this:

If the company meets its $3.5 billion annualized cost-savings target by 2025—via closing 73 facilities and reducing its workforce by 20,000—the EPS growth could accelerate, making the current valuation a bargain.

Catalysts for a Rebound

1. Cost-Cutting Execution: The success of the “Network Reconfiguration” and “Efficiency Reimagined” initiatives will be critical. If the 20,000 job cuts and facility closures reduce operational drag without disrupting service quality, margins could expand significantly.
2. Macroeconomic Recovery: UPS's International segment, which now boasts a 14.7% operating margin, is a growth engine. A stabilization in global trade and consumer spending could lift its results further.
3. Supply Chain Solutions Turnaround: The segment's 1.7% margin is a sore spot, but its non-GAAP margin of 3.6% hints at potential. Management's focus on high-margin logistics services could eventually offset the Coyote loss.

Risks to Consider

• Labor Strains: Reducing the workforce by 20,000 risks operational hiccups, especially during peak seasons.
• Economic Downturn: If consumer spending weakens further, U.S. Domestic revenue growth (already at 1.4%) could stagnate.
• Regulatory Headwinds: Antitrust scrutiny in the logistics sector remains a wildcard.

Investment Thesis

UPS's stock is pricing in a lot of pessimism. While the near-term path is rocky, the company is making aggressive moves to become leaner and more profitable. The forward P/E of 18.19 is reasonable if EPS growth materializes, and the $135 price point could mark a bottom.

Investors should monitor two key milestones:
1. Q3 2025 Earnings: Due October 24, 2024, these results will test whether cost savings are translating to higher margins.
2. Workforce Restructuring Completion: By June 2025, the facility closures and layoffs should be largely done, allowing focus on efficiency gains.

Final Take

UPS is a company at a crossroads. Its valuation is clouded by macro fears and short-term pain, but the structural changes underway—driven by a 14.7% margin in its International segment and 4.5% revenue-per-piece growth in the U.S.—suggest resilience. For long-term investors willing to endure near-term volatility, UPS could be a diamond in the rough. Just keep an eye on execution and macro signals.

Risk Rating: Moderate-High
Hold for: 1–3 years
Buy Signal: A beat on Q3 earnings or a positive update on cost-savings progress.

This analysis is for informational purposes only and should not be considered financial advice. Always consult a professional before making investment decisions.