Is UPS Stock a Bad-News Buy?
Key Points
Amazon is making its logistics network available to every business.
UPS stock was down on the news, as investors have a new reason to worry about the company's future.
Shares of United Parcel Service (NYSE: UPS) have been tumbling recently on the news that Amazon (NASDAQ: AMZN) is launching Amazon Supply Chain Services. For logistics giant UPS, that's a concerning development as it means it may have a huge new competitor to worry about.
It's more bad news on top of the already existing flurry of negativity around the logistics company. UPS stock is down more than 50% in the past five years, as worsening trade conditions have weighed on its operations. The business has also experienced a revenue decline in two of the past three years.
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Does this recent news about Amazon make the transportation stock destined to go even lower this year, or could UPS actually be a good buy on weakness?
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Should UPS investors be worried about Amazon?
Amazon is a formidable threat in logistics. It has created an exceptional brand that's become synonymous with fast, next-day delivery. In some markets, it's able to even provide 1-hour delivery.
But the good news is that this is a massive global market. Ironically, UPS has actually reduced the business it has done with Amazon in an effort to focus on improving its margins. While the controversial move may be bad for the top line, it can be a net win in the long run if it strengthens profitability and allows the company to become leaner. UPS has announced that this year it will eliminate up to 30,000 jobs.
Amazon has in the past expanded into the grocery business with its acquisition of Whole Foods and has also dabbled in healthcare, and it's debatable how much it has truly disrupted those industries. Logistics may be a more practical growth opportunity for Amazon to pursue, but it could take years to see how significant that proves to be. And in the meantime, the industry is also likely to grow. It may be premature to worry about this having significant implications for UPS.
Is UPS stock worth buying?
The Amazon threat is one that's important for UPS investors to keep an eye on, but it's not one that should dissuade you from investing in UPS. The business is still a leader in logistics, and with a modest valuation -- it trades at just 14 times its estimated future profits (based on analyst projections) -- it's an attractively priced stock to own.
It may take some time for UPS stock to win over investors, but buying it now while pessimism is high could be ideal, as it gives you the opportunity to secure a good price for a business that is still doing reasonably well and which may flourish under stronger economic conditions.
Should you buy stock in United Parcel Service right now?
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David Jagielski, CPA 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.
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