United Parcel Service (NYSE: UPS) stock was trading at deep value levels, offering investors the second, generational buying opportunity in five years, which was confirmed by the Q1 results. The results show that market fears for the quarter, while justified, were unfounded. The Q1/Q2 price correction was an overreaction that extended the existing trend deeper into oversold territory.

Price action following the release was bullish. The market cheered the news, revealing strong support at April lows, suggesting the bottom is in or close at hand and the rebound is about to begin. However, uncertainty in the outlook may continue to hinder action until later in the year, when more clarity becomes available. Until then, investors have time to build positions, collect the 6.75% annualized dividend yield, and benefit from the impact of share repurchases.

Significantly lower lows are unlikely for this market for several reasons. The first is the trend in analyst sentiment. Analysts' consensus sentiment, as reported by MarketBeat, cooled from Moderate Buy to Hold in Q2, and the price target also fell, but the market overcorrected. Trading near $97, the stock is at the analyst's floor with consensus and recent revisions forecasting a 30% upside.

The first post-release updates also align with that forecast, ranging from $109 to $150, and there is valuation to consider. The stock is trading at a deep discount to the broader market, nearly 50%, and is under 8X its 2023 EPS forecast, which is likely a low estimate. 

Institutional activity is another reason to believe UPS stock is at or very near its bottom. Activity reached a multi-year high in Q1, contributing to market volatility, but was net bullish by the end of the quarter and remains so in Q2. This provides a tailwind for the action and a substantial support base with ownership above 60%. 

UPS Delivers Strong Report for Q1

UPS had a solid quarter in Q1 despite the reported -0.9% revenue decline. The decline is primarily due to a nearly 15% contraction in Supply Chain Solutions, linked to a divestiture. The divestiture is part of the company’s transformation plan, which is working, and core businesses are growing, driving 220 basis points of outperformance relative to the consensus figure.

The U.S. segment grew by 1.4%, with cargo and pricing offsetting a slight decline in volume, while the international segment was stronger. The international segment grew by 2.7% on a 7.1% increase in average daily volume and is expected to remain steady. However, there is increased uncertainty in the outlook for this and other transportation stocks. 

The margin news is better and central to the investment thesis. Last year, the company leaned into transformation, reconfiguration, and cost reduction, and it was a timely move. The impact is steadily improving the operating margin despite losing the Amazon contract and macroeconomic headwinds, including a 20 bps improvement in Q1.

The net result is a 4.2% increase in adjusted earnings, up $0.06 YOY to $1.49, and nearly 800 bps ahead of analysts' forecasts. Margin is expected to continue improving as the year progresses and CFO Brian Dykes expects to reach the $3.5 billion target by year end. 

UPS Capital Return is a Significant Impact for Investors

UPS’ capital return is significant. It includes dividends and share repurchases, which reduced the count by roughly 0.8% year-over-year in Q1. The dividend is worth more than 6% in annual yield as of the end of April, and it is a reliable payment with a payout ratio of roughly 60%.

The balance sheet reflects the impact of the divestiture, including reduced equity. Still, it remains healthy, with low leverage relative to both equity and assets, so distribution increases may also be expected. UPS may not increase its distribution aggressively this year, but increases are likely to continue for the foreseeable future.

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