UPS Stock Has 25% Upside, According to One Wall Street Analyst

UBS analyst Tom Wadewitz recently raised his price target on shares of United Parcel Service (NYSE: UPS) from $159 to $170 and maintained a buy rating on the stock following release of its third-quarter earnings report. The price target is one of the more aggressive on Wall Street and represents a more than 25% premium to the price. It also comes as many of UPS' metrics are starting to move in the right direction. Here's why.

UPS' upside potential

Delivery volumes are increasing (up 5.4% in the third quarter) as UPS comes up against easier comparisons from last year and is growing its lower revenue per piece (RPP) volume. In addition, the company is reducing capacity in line with demand, cutting jobs, and rationalizing locations, all of which helped cut cost per piece (CPP) by 4.1% in the third quarter. As a result, management raised its full-year adjusted operating margin guidance from 9.4% to 9.6%.

The improvements give the analyst community optimism that the worst might be over for the transportation company.

Is UPS worth buying now?

The stock is attractive, since UPS will likely see better days ahead. And a price-to-earnings ratio of 18.1 times 2024 estimated earnings isn't expensive for a company with prospects for double-digit growth in earnings over the next few years as delivery volumes grow, cost cuts help out margins, and industry overcapacity is reduced leading to better pricing power.

Still, the company has plenty of work to do to meet its full-year guidance of $2.95 billion in adjusted operating profit versus $1.98 billion in the third quarter). RPP keeps declining as the business takes on lower-margin deliveries with lower revenue per piece. Meanwhile, the economy isn't helping much.

Image source: Getty Images.

On balance, UPS does look undervalued, but perhaps not by as much as the UBS price target implies. Those buying the stock need to be tolerant of the risk in the company meeting its full-year guidance. That said, the dividend (currently yielding 4.9%) looks sustainable, provided this proves to be a trough year for the company.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.