Is UPS the best shipping stock for you?
Management’s guidance on a recent investor day presentation raised as many questions as it answered.
Dividend yield is 4.4% UPS (UPS 1.04%) And while the three-year outlook presented at the recent Investor and Analyst Day makes the stock look very attractive, is it enough to warrant an investment in a company that has faced challenges over the past year? Moreover, there are some question marks regarding the guidelines.
UPS guidelines raise questions
There are three interrelated factors to consider:
- UPS missed its initial 2023 guidance.
- Considering management’s recent comments about the first quarter, UPS has some work to do to meet full-year 2024 guidance.
- The three-year financial target seems ambitious, and at least one Wall Street analyst said the market doesn’t buy it.
A cynical view might conclude that investors are counting on the company’s optimistic medium-term goals, as it missed guidance last year and is under pressure to meet its 2024 guidance. But I think that’s an overly critical view. Here’s why:
What happened in 2023
UPS missed guidance last year, as can be seen by comparing the third and fourth columns of the table below. Nonetheless, UPS achieved its 2023 goal (provided in its 2021 Investor Day presentation). 1 year ago in 2022As can be seen by comparing the first and second columns.
The volatility of UPS performance over the past two years demonstrates the difficulty of predicting shipment volumes. This is not simply a matter of predicting economic growth (which determines shipping volumes). This is the return on spending on services instead of goods generated by the lifting of lockdown measures.
If that wasn’t enough, the company’s high-profile labor contract negotiations have resulted in a significant decline in 2023 deliveries as customers fear a strike and switch their deliveries to other networks.
UPS | 2023 Investor Day goals given in 2021 | Actual in 2022 | Initial guidance for 2023 | Actual in 2023 |
|---|---|---|---|---|
revenue | $98 billion to $102 billion | $100.3 billion | $97 billion to $99.4 billion | $91 billion |
Adjusted operating profit margin | 12.7% ~ 13.7% | 13.8% | 12.8% ~ 13.6% | 10.9% |
Adjusted operating profit | $12.4 billion to $14 billion | $13.9 billion | $12.42 billion ~ $13.52 billion | 9.9 billion dollars |
Data source: UPS presentation.
It’s never good news when a company misses guidance, but it’s fair to say that UPS faces a difficult year in 2023.
What about 2024?
At the end of the Q&A session, CFO Brian Newman had a negative surprise. UPS maintained its full-year guidance laid out in its fourth-quarter 2023 earnings call in late January that its adjusted operating profit would decline 20 to 30 percent year-over-year in the first half of the year and grow 20 to 30 percent in the second half. year after year. Newman’s prediction of a 40% decline in the first quarter left investors wondering how UPS would meet its full-year guidance.
This number is well below the Wall Street consensus for the first quarter and requires UPS to hit the consensus for the second quarter to reach the bottom half of its guidance.
UPS | First quarter | 2nd quarter | second half |
|---|---|---|---|
Actual adjusted operating profit in 2023 | $2.6 billion | $2.9 billion | $4.4 billion |
2024 Guidance for Recent Investor Days | 40% reduction | 20% to 30% decrease in the first half of the year compared to the same period last year | H2 increased by 20% to 30% compared to the previous year |
Adjusted operating profit guidance for 2024 (assuming a 40% decline in the first quarter) | $1.5 billion | $2.3 billion to $2.9 billion | $5.3 billion to $5.7 billion |
Wall Street consensus estimate for adjusted operating profit | $1.75 billion | $2.38 billion | $5.61 billion |
Data Source: UPS Presentation
Additionally, if UPS is having trouble meeting estimates, that could mean the company isn’t regaining customers lost due to the labor dispute in 2023. Winning back these customers is critical to management’s expectations of positive sales growth in 2023. Second half. According to Newman in January, the return to sales growth “will be driven primarily by the production shift experienced last year during labor negotiations in the United States.”
What it means for investors
As previously mentioned, the first quarter guidance is cause for concern. However, it is also important to remember that these calculations are relative to Wall Street estimates and that management has a much better view of the flow of winning back lost customers than analysts. Management is not responsible for Wall Street estimates, and it would be understandable to ‘miss’ 2023 earnings in the circumstances discussed above.
Image source: Getty Images.
Moreover, no one is buying the stock for its first quarter earnings, and the share price decline since the presentation suggests that some pessimism is now priced into the stock. On balance, it makes sense to see what guidance management gives in its first quarter earnings call, probably in late April, before concluding that UPS will miss its full-year 2024 guidance. UPS remains attractive, but cautious investors may want to wait to hear from management before buying.
Isamaha does not have any positions in these stocks. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
