United Parcel Service Is Making Big Moves: Time to Buy Before It Skyrockets?

Key Points

• Investors were excited by United Parcel Service as e-commerce sales rose during the coronavirus pandemic.

• Wall Street has soured on the stock now that the world has learned to live with COVID.

• Investors are even more downbeat because of costly changes to UPS' business, but they may be overlooking the long-term opportunity here.

• 10 stocks we like better than United Parcel Service ›

Shares of United Parcel Service (NYSE: UPS) got caught up in a big story during the coronavirus pandemic period. When Wall Street realized, yet again, that trees don't grow to the sky, UPS, as it is more commonly known, saw its stock price crater. And the company just made things worse when management undertook a major business overhaul.

But there are big moves being made that could set the business up for a turnaround.

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Image source: Getty Images.

What went wrong during the pandemic?

When COVID hit, people were asked to practice social distancing. People were allowed to work from home. Businesses deemed non-essentially were shut down. In many ways the world came to a screeching halt. But people didn't stop spending money. They just spent their money differently.

One of the biggest changes was a huge increase in e-commerce spending. People couldn't go to stores, but they could still get the products they wanted online. Online retailers like Amazon (NASDAQ: AMZN) were more than happy to sate consumers' desires to spend, leading to a material increase in the number of packages being handled by UPS.

Wall Street pumped up UPS's stock, extrapolating the pandemic demand spike too far into the future. And when pandemic restrictions proved to be a temporary issue, UPS's stock price plunged. That was when management made things worse, by undertaking a major corporate overhaul.

UPS' changes are painful in the short term

The changes UPS is making are not small. They are big moves that management hopes will set the company up for a brighter long-term future. But long-term change takes time and, usually, comes with material upfront costs.

For example, UPS had to come to terms with its union on a new contract. That led to material cost inflation that crimped the company's margins. But not agreeing to a new contract wasn't an option, as UPS has to have employees to deliver packages. Also, the company chose to exit some less desirable businesses. That meant selling divisions and shrinking the overall company.

In addition, UPS has been focused on increasing its use of technology. The capital investments needed here are large up front, but should provide years of benefit in the future. However, as technology was added, the company's improved efficiency meant that it had too many facilities and employees. Trimming staff and closing (and often selling) buildings adds even more upfront costs to the equation.

UPS is still in the middle of the big changes it is making. The most recent big announcement was the pre-emptive decision to reduce its relationship with Amazon. Amazon is a huge customer, but the packages UPS delivers for the company aren't very profitable for UPS. Which highlights another of management's goals, focusing on its most profitable business lines.

Investors aren't convinced that UPS has a bright future. This is why the stock has lost nearly two-thirds of its value after hitting a high water mark during the pandemic. It is also why the dividend yield is an ultra high 7.8%.

Is it always darkest before the dawn?

UPS' top level financial results aren't compelling right now. And the dividend payout ratio is worryingly high at nearly 100%, so dividend investors will want to tread with caution. It wouldn't be shocking to see a dividend cut take place as the business overhaul continues.

But there are signs of progress. For example, despite revenues being lower in the company's U.S. business in the second quarter of 2025, the profit per piece was up 5.5%. That's basically what management is attempting to achieve. It wants to be a smaller, more profitable company.

The per package profit uptick could be the early sign that a long-term turnaround for the business is not only possible, but increasingly probable. Contrarian investors willing to buy into a turnaround story might want to consider jumping on this stock before other investors start to catch on to the positives hidden beneath today's negatives.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and United Parcel Service. The Motley Fool has a disclosure policy.