3 Reasons to Avoid UPS and 1 Stock to Buy Instead

United Parcel Service’s 22.5% return over the past six months has outpaced the S&P 500 by 18%, and its stock price has climbed to $106.48 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in United Parcel Service, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think United Parcel Service Will Underperform?

Despite the momentum, we're swiping left on United Parcel Service for now. Here are three reasons we avoid UPS and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, United Parcel Service struggled to consistently increase demand as its $88.66 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and signals it’s a low quality business.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, United Parcel Service’s margin dropped by 5.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. United Parcel Service’s free cash flow margin for the trailing 12 months was 5.4%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, United Parcel Service’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of United Parcel Service, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 14.9× forward P/E (or $106.48 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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