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How Should Investors Deal With UPS Stock After Q3 Earnings Beat?
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United Parcel Service (UPS - Free Report) reported better-than-expected third-quarter 2024 earnings per share on Oct. 24. Earnings and revenues increased year over year for the first time in about a year and a half. This development pleased investors, resulting in the UPS stock gaining 4.6% since the earnings release.
Highlights of United Parcel’s Q3 Earnings
UPS reported third-quarter 2024 earnings of $1.76 per share, which beat the Zacks Consensus Estimate of $1.65 and improved 12.1% year over year. Revenues of $22.25 billion marginally lagged the Zacks Consensus Estimate but increased 5.6% year over year on strong average daily volume.
U.S. Domestic Package revenues of $14.45 billion grew 5.8% year over year, owing to a 6.5% increase in average daily volume. Revenues in the International Package division were $4.41 billion, which increased 3.4%year over year due to a 2.5% rise in revenue per piece. Supply Chain Solutions’ revenues of $3.38 billion increased 8% year over year .
UPS Warns of Below-Par Peak Season Shipping Activity
On a somber note, United Parcel trimmed its full-year revenue view to $91.1 billion from the $93 billion mentioned earlier. The lower revenue forecast comes as UPS completed the sale of Coyote Logistics, its freight-brokerage business, for slightly more than $1 billion to RXO Inc. (RXO - Free Report) in the third quarter. The adjusted operating margin is expected to be 9.6% for the current year. United Parcel’s previously provided revenue and operating margin targets included the expected revenues and profits associated with Coyote Logistics.
The trimmed revenue forecast also highlights that UPS does not expect shipping activity to be buoyant in the final quarter of 2024 due to the slowdown in online sales in the United States, apart from the softness of global manufacturing activity. United Parcel’s chief executive officer, Carol Tome, stated on the third-quarter 2024 conference call that shippers tempered their volume expectations. Per Tome, more than 100 of UPS’s top customers, who represent 60% of network volume and 85% of the peak surge, have tightened their forecasts for the holiday season.
Disappointing Price Performance for United Parcel
The earnings beat in the third quarter, and the return to earnings and revenue growth after more than a year resulted in a short-term price uptick of UPS. However, shares of the package delivery company have disappointed this year, underperforming its industry, the S&P 500 and rival FedEx (FDX - Free Report) year to date.
YTD Price Comparison
Image Source: Zacks Investment Research
Reasons for the Struggle of UPS Stock
United Parcel has been suffering from revenue weakness as geopolitical uncertainty and higher inflation continue to hurt consumer sentiment and growth expectations. The weak demand scenario has led to a decline in the volume of packages shipped. The trimming of the current-year revenue forecast during the third-quarter earnings release indicates that top-line woes are unlikely to go away anytime soon.
Labor costs, courtesy of the deal with the Teamsters union, are high, limiting bottom-line growth. Per UPS management, due to this deal, wage and benefit costs will increase, seeing a 3.3% compound annual growth rate for the next five years. Rising capital expenses in this era of revenue weakness are unwelcome and may dent profit margins.
In 2022, United Parcel incurred $4.8 billion in capital expenditure (capex), which rose 13.7% year over year. The metric increased year over year to $5.2 billion in 2023. The capex guidance for 2024 is $4 billion.is also disappointing. Notably, capex spending does not end after buying an asset, and companies need to keep up with repairs and maintenance to protect the value of the investment.
UPS's financial metrics indicate that its leverage is elevated, which is a negative for its shareholders. The long-term debt burden of the company was $20.3 billion at the end of the third quarter of 2024. Its long-term debt burden at 2023-end was lower at $18.9 billion.
United Parcel’s Long-Term Debt to Capitalization
Image Source: Zacks Investment Research
Unfavorable Earnings Estimate Revisions for UPS
Due to the struggles of the UPS stock and the bleak revenue outlook, earnings estimates for UPS have been revised downward over the past 60 days.
Image Source: Zacks Investment Research
United Parcel’s Valuation Vs S&P 500 Favorable
From a valuation perspective, UPS is trading at a discount to the S&P 500 and below its five-year median. United Parcel currently has an impressive Value Score of B. The company also trades below the sector’s reading of 16.4X.
Image Source: Zacks Investment Research
What Should Investors Do About UPS Stock
Apart from United Parcel’s impressive valuation scenario in comparison with its sector and the S&P 500 Index, the company’s shareholder-friendly approach is commendable. UPS demonstrates financial strength with $5.3 billion in free cash flow in 2023.
Shareholder-friendly actions, including the 15th consecutive annual dividend increase and a $5-billion share repurchase authorization, bode well. In 2024, UPS’s board of directors raised its quarterly cash dividend to $1.63 per share. For 2024, United Parcel expects to make dividend payments of $5.4 billion.
Despite the above-mentioned positives and the fact that the company has displayed earnings and revenue growth after quite a few quarters in the third quarter of 2024, we believe that investors should not buy the stock right now as it is mired in a number of headwinds highlighted throughout the writeup.
Investors should, instead, monitor the company’s developments closely for a more appropriate entry point. Staying invested for solid long-term prospects will be prudent for those already owning the stock. United Parcel’s Zacks Rank #3 (Hold) supports our thesis.
Image: Bigstock
How Should Investors Deal With UPS Stock After Q3 Earnings Beat?
United Parcel Service (UPS - Free Report) reported better-than-expected third-quarter 2024 earnings per share on Oct. 24. Earnings and revenues increased year over year for the first time in about a year and a half. This development pleased investors, resulting in the UPS stock gaining 4.6% since the earnings release.
Highlights of United Parcel’s Q3 Earnings
UPS reported third-quarter 2024 earnings of $1.76 per share, which beat the Zacks Consensus Estimate of $1.65 and improved 12.1% year over year. Revenues of $22.25 billion marginally lagged the Zacks Consensus Estimate but increased 5.6% year over year on strong average daily volume.
U.S. Domestic Package revenues of $14.45 billion grew 5.8% year over year, owing to a 6.5% increase in average daily volume. Revenues in the International Package division were $4.41 billion, which increased 3.4%year over year due to a 2.5% rise in revenue per piece. Supply Chain Solutions’ revenues of $3.38 billion increased 8% year over year .
UPS Warns of Below-Par Peak Season Shipping Activity
On a somber note, United Parcel trimmed its full-year revenue view to $91.1 billion from the $93 billion mentioned earlier. The lower revenue forecast comes as UPS completed the sale of Coyote Logistics, its freight-brokerage business, for slightly more than $1 billion to RXO Inc. (RXO - Free Report) in the third quarter. The adjusted operating margin is expected to be 9.6% for the current year. United Parcel’s previously provided revenue and operating margin targets included the expected revenues and profits associated with Coyote Logistics.
The trimmed revenue forecast also highlights that UPS does not expect shipping activity to be buoyant in the final quarter of 2024 due to the slowdown in online sales in the United States, apart from the softness of global manufacturing activity. United Parcel’s chief executive officer, Carol Tome, stated on the third-quarter 2024 conference call that shippers tempered their volume expectations. Per Tome, more than 100 of UPS’s top customers, who represent 60% of network volume and 85% of the peak surge, have tightened their forecasts for the holiday season.
Disappointing Price Performance for United Parcel
The earnings beat in the third quarter, and the return to earnings and revenue growth after more than a year resulted in a short-term price uptick of UPS. However, shares of the package delivery company have disappointed this year, underperforming its industry, the S&P 500 and rival FedEx (FDX - Free Report) year to date.
YTD Price Comparison
Reasons for the Struggle of UPS Stock
United Parcel has been suffering from revenue weakness as geopolitical uncertainty and higher inflation continue to hurt consumer sentiment and growth expectations. The weak demand scenario has led to a decline in the volume of packages shipped. The trimming of the current-year revenue forecast during the third-quarter earnings release indicates that top-line woes are unlikely to go away anytime soon.
Labor costs, courtesy of the deal with the Teamsters union, are high, limiting bottom-line growth. Per UPS management, due to this deal, wage and benefit costs will increase, seeing a 3.3% compound annual growth rate for the next five years. Rising capital expenses in this era of revenue weakness are unwelcome and may dent profit margins.
In 2022, United Parcel incurred $4.8 billion in capital expenditure (capex), which rose 13.7% year over year. The metric increased year over year to $5.2 billion in 2023. The capex guidance for 2024 is $4 billion.is also disappointing. Notably, capex spending does not end after buying an asset, and companies need to keep up with repairs and maintenance to protect the value of the investment.
UPS's financial metrics indicate that its leverage is elevated, which is a negative for its shareholders. The long-term debt burden of the company was $20.3 billion at the end of the third quarter of 2024. Its long-term debt burden at 2023-end was lower at $18.9 billion.
United Parcel’s Long-Term Debt to Capitalization
Unfavorable Earnings Estimate Revisions for UPS
Due to the struggles of the UPS stock and the bleak revenue outlook, earnings estimates for UPS have been revised downward over the past 60 days.
United Parcel’s Valuation Vs S&P 500 Favorable
From a valuation perspective, UPS is trading at a discount to the S&P 500 and below its five-year median. United Parcel currently has an impressive Value Score of B. The company also trades below the sector’s reading of 16.4X.
What Should Investors Do About UPS Stock
Apart from United Parcel’s impressive valuation scenario in comparison with its sector and the S&P 500 Index, the company’s shareholder-friendly approach is commendable. UPS demonstrates financial strength with $5.3 billion in free cash flow in 2023.
Shareholder-friendly actions, including the 15th consecutive annual dividend increase and a $5-billion share repurchase authorization, bode well. In 2024, UPS’s board of directors raised its quarterly cash dividend to $1.63 per share. For 2024, United Parcel expects to make dividend payments of $5.4 billion.
Despite the above-mentioned positives and the fact that the company has displayed earnings and revenue growth after quite a few quarters in the third quarter of 2024, we believe that investors should not buy the stock right now as it is mired in a number of headwinds highlighted throughout the writeup.
Investors should, instead, monitor the company’s developments closely for a more appropriate entry point. Staying invested for solid long-term prospects will be prudent for those already owning the stock. United Parcel’s Zacks Rank #3 (Hold) supports our thesis.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here