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UPS (UPS) Stock Looks Undervalued Following Its 36% Five Year Fall

Simply Wall St · 1d ago

United Parcel Service has seen its share price fall back in recent years, which puts the spotlight squarely on one question for you as an investor: Are the cash flows that UPS can generate over time enough to justify where the stock trades today, based on a Discounted Cash Flow (DCF) view of its intrinsic value?

  • Over the past 5 years the stock has declined 35.8%, which makes the link between UPS’s current market value and its long term cash generation much more important to understand.
  • The launch of UPS Secure Commerce, with its focus on fraud prevention and risk management across the shipping chain, can influence expectations for future cash flows by affecting how much clients are willing to pay for higher reliability and how sticky those relationships become.
  • If you'd rather focus on earnings, this one's for you. See what United Parcel Service's 17.3x P/E says about the price.

The issue now is whether the current UPS share price lines up with the intrinsic value suggested by its cash flows under a Discounted Cash Flow (DCF) approach.

If you want to stress test United Parcel Service against other potential ideas using a similar cash flow lens, a focused stock screen built around 31 high quality undervalued stocks can be a useful next step.

Is United Parcel Service Still Cheap on Cash Flow?

The Discounted Cash Flow (DCF) model here looks at what United Parcel Service could return to shareholders through future free cash flows, then discounts those amounts back to today. UPS generated last twelve month free cash flow of about $4.6b, and the projections used in this 2 Stage Free Cash Flow to Equity model assume that this cash generation grows from that base rather than shrinking.

The market price of $93.02 therefore reflects a view that is more cautious than the DCF outcome, since the Discounted Cash Flow (DCF) projections put United Parcel Service's estimated intrinsic value substantially above the current share price. Because UPS Secure Commerce focuses on fraud prevention and risk management across the delivery chain, that kind of service can support the case for durable cash flows even if investors remain focused on near term risks. This helps explain why the price stays below intrinsic value. To see how the full set of assumptions translate into an intrinsic value estimate, you can review the detailed model and comparison for UPS. Find out what United Parcel Service could be worth using our Discounted Cash Flow (DCF) estimate.

The United Parcel Service Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for United Parcel Service pick up where the DCF puzzle leaves off by spelling out which expectations for growth, margins and earnings would need to hold for the stock to be worth meaningfully more or less than today’s market price, and they sit on the Community page so you can see how different readers frame United Parcel Service's future. Each one treats fair value as a thesis about the business that you can watch play out over time, rather than a one off snapshot.

Community views on United Parcel Service are split between those who see more upside in the current reset and those focused on execution risk and capital strain.

Bull case: roughly fairly valued

"Management is taking steps to address the pressures through their "Efficiency Reimagined" initiative. If successful, this could stabilize or improve profitability…"

Discover why this Narrative puts United Parcel Service at roughly fairly valued.

Bear case: 9% overvalued

"Bearish analysts expect rising labor pressures, frozen dividends and the risk of future industrial action to weigh on United Parcel Service's flexibility to manage costs and capital returns over time…"

Explore why this Narrative puts United Parcel Service at 9% overvalued.

One more United Parcel Service check that sits alongside the price tag

Before you file away your view on United Parcel Service, it helps to ask who is steering the ship and how their rewards line up with your interests. See who runs United Parcel Service and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.