The package delivery giant’s earnings will dramatically improve in the second half.
It’s been a challenging year for UPS (UPS 2.97%), and the stock declined 13% in the first half of the year, according to data from S&P Global Market Intelligence. The decline reflects the ongoing challenges caused by a decrease in delivery volumes and the increase in compensation costs resulting from a new labor contract agreed upon last year.
UPS’s challenging year
It gets worse. Last year’s protracted labor negotiations caused customers to divert deliveries to other networks, fearing strike action at UPS facilities last year. As such, UPS found itself battling declining volumes and difficult cost comparisons with the same quarter of previous years.
A second-half recovery
But here’s the thing: Management expects a dramatic turnaround in earnings growth in the second half of 2024. Its guidance for 2024 implies a 20% to 30% decline in adjusted operating profit in the first half compared with the first half of 2023, with adjusted operating profit increasing 20% to 30% in the second half of the year — again compared with the second half of 2023.
The improvement is due to the expectation that volumes will improve throughout the year. This viewpoint is shared by its big rival, FedEx, whose management believes delivery volumes will improve. FedEx’s management also believes the pricing environment is “competitive but rational,” which implies pricing can hold up. With volumes improving, both companies could see an improved price per package.
In addition, given that the compensation cost increases started in the third quarter of 2023, UPS is about to start lapping them, making its year-over-year cost comparisons easier. Furthermore, UPS is cutting 12,000 jobs in 2024, saving $1 billion in costs in the process. Much of the cost benefit will come from this in the year’s second half.
Everything points to a much stronger second half for UPS.
Image source: Getty Images.
UPS beyond 2024
Presuming earnings recover, UPS will exit 2024 with strong year-over-year earnings growth as it works toward its three-year aims, as outlined in its investor day presentation earlier in the year.
Investors have cause for optimism over them because they include expanding on UPS’s already successful expansion into the small and medium-sized business (SMB) and healthcare markets. Both tend to be higher-margin areas for UPS. Meanwhile, management is making substantive investments in technology, such as smart facilities and automation, to improve productivity and allow it to consolidate facilities and cut costs accordingly.
All told, UPS’s best days are ahead, and the earnings recovery starts in the third quarter of 2024.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.