Earnings Preview: After a weak first half, UPS looks poised to regain strength

United Parcel Service, Inc. (NYSE: UPS) is preparing to report third-quarter earnings on Thursday even as the company navigates through a difficult operating environment, marked by supply chain challenges and increasing competition. The cargo giant, which is on a major cost-cutting drive that includes headcount reductions, has trimmed its operating margin forecast to FY24 amid continued demand slowdown.  

For UPS shareholders, the earnings event is significant as it could determine the stock’s course for the remainder of the year, following a long streak of disappointing performance. The shares have lost about 35% since peaking more than two and half years ago, draining shareholder value significantly. Yet, regular dividend hikes and the better-than-average yield make UPS a strong choice for income investors.

Estimates

The shipping company’s third-quarter report is slated for release on Thursday, October 24, at 6:00 am ET. It is estimated that Q3 revenue grew about 5% from last year to $22.14 billion. The consensus earnings estimate is $1.63 per share for the September quarter, compared to $1.57 per share in the prior-year quarter.

In the most recent quarter, the business returned to volume growth in the US after more than two years, though its overall financial performance was not very impressive during that period. Recently, the management said the company is on track to return to operating profit growth this year, reversing the recent trend of declines.

New Threat

UPS and FedEx have long been the top players in the industry, constantly vying for market shares. However, Amazon’s rapidly expanding shipping division has been eating into the businesses of these legacy cargo movers. At the same time, the margins of UPS remain under pressure from elevated costs, mainly those associated with new labor contracts. Adding to the problem, a surge in lower-profit shipments has forced the management to slash its full-year operating margin target.

“While we still expect an operating profit bathtub effect with solid earnings growth in the back half of the year, the growth rate will not be as high as we projected at the beginning of the year. Accordingly, we are adjusting our full-year operating margin guidance to reflect the nature of the volume flowing through our U.S. network. As a result, we now expect consolidated revenue of approximately $93 billion and a consolidated operating margin of approximately 9.4%. Importantly, we expect to exit the final month of 2024 with a U.S. operating margin of 10%…” UPS CEO Carol Tom said at the Q2 earnings call.

Q2 Results Miss

In the June quarter, adjusted profit dropped 30% annually to $1.79 per share and missed the Street view, after beating in the trailing four quarters. On a reported basis, net income was $1.41 billion or $1.65 per share in Q2, compared to $2.08 billion or $2.42 per share last year. There was a modest year-over-year dip in revenue to $21.8 billion during the three months. Domestic revenues and international revenues decreased by 2% and 1% respectively. The top line missed expectations, continuing the recent trend.

A few months ago, the UPS leadership signed an agreement to acquire Mexican express delivery company Estafeta, as part of the strategy to expand its footprint in the small package and logistics segment. The company expects to close the transaction by year-end.

UPS shares have underperformed the industry and the broad market quite often in the recent past. Extending the weakness seen last week, the stock opened lower on Monday.