UPS Q1 Earnings Confirms Management’s Post-Pandemic Strategy Is Not Working (Downgrade)

Difficult times often separate the men from the boys, and the best-run companies from those with mediocre and poor management teams. Since 2019 we have seen COVID hit, price levels rise exponentially, and conflicts abroad create added challenges as well.

One company that has struggled since inflation began to accelerate in early 2021 is UPS (NYSE:UPS). The $124 billion dollar carrier was one of the better performing stocks in the market for some time, but this company has consistently struggled over the last 3 years.

UPS is down 10.44% as measured by total returns since May of 2021, while the S&P 500 is up 25.75% as measured by total returns during this same time period.

I last wrote about UPS in April of 2023, and I rated the company a sell primarily because of what I viewed as a peaking profit cycle and the threat of companies such as Amazon (AMZN). I am downgrading the stock to a strong sell today. Management has not proven they have a real or substantive plan or strategy to drive meaningful growth in the US or abroad in the current operating environment, and the company is likely to continue to see rising costs as the carrier continues to spend heavily in the US as well. The stock also looks overvalued using several metrics given the deteriorating growth outlook for the company’s core business.

UPS’s recent earnings report highlighted the continued challenges management has failed to adjust to since prices and costs began to rise significantly for the carrier in early 2021. The company recently reported earnings of $1.43 GAAP actual and revenues of $21.71 billion, beating consensus estimates for EPS but missing on revenues. Estimates were for EPS of $128 a share, while expected revenue was $21.84 billion.

The earnings report looked respectable on the face of things, but there are several key underlying concerns that should alarm investors in the recent disclosures. First, management’s guidance was for nearly no revenue growth this year. While UPS did see some slight margin expansion and the company was able to beat lowered earnings per share estimates, the company still expects revenues to be between $92-$94 billion this year, versus revenues of nearly $91 billion for the full year in 2023. UPS also stated that for the quarter that the average daily volume fell by 3.2% from the same time last year, and average revenue per piece fell by .3% on a year-to-year basis. The leaders of this carrier also confirmed that they plan to continue to spend aggressively. The company’s current capital expenditure plans for this year are to spend $4.5 billion. UPS continues to spend aggressively while shipping volume and revenues per shipped item are falling, and management has not been successful in finding alternative revenues as e-commerce continues to slow post-pandemic.

UPS has been hurt significantly by the slowdown in e-commerce the company has seen since 2021, and management’s plan to spend aggressively as part of the carrier’s strategy to reduce reliance on manual labor and increase productivity. The company also hopes to drive revenues in the health care logistics business to offset the expected continue decline in e-commerce. The problem with UPS’s plan is competition in the health care segment is fierce, and Amazon (AMZN) offering delivery in 50 states with Amazon clinic. UPS also expects labor costs to rise 9% this year alone, and the company’s spending plan has not been impactful in reducing overhead. UPS expects capital expenditures to be nearly $17-18 billion over just the next 3 years between 2024-2026.

UPS’s quarterly revenue peaked in December 2021, and the company’s annual revenues have been in steady decline since September 2022. In my view, management has not been able to operate successfully in the current economic environment.

UPS has also been spending aggressively for several years now on new cap-ex projects, and management announced plans to spend nearly $5 billion this year.

The company was spending less than $3 billion a year prior to 2017, but the carrier’s spending has increased dramatically over the last seven years. This is also why the margin compression UPS has seen recently should concern investors as well. While the company reported operating adjusted margins in the first quarter at 8%, the carrier’s operating adjusted margins were 11% last year.

UPS’s net margins have been in general decline since late 2021, and the company is also expecting to see a 9% in labor costs alone as the new contracts with employees begin to kick in this year. This comes after the company saw a 12% increase in wages in the fourth quarter of last year, forcing the company to cut nearly 12,000 jobs.

UPS’s international revenue growth has also stagnated over the last three years.

The leading carrier saw international revenues reach nearly $20 billion in 2021, but management hasn’t been able to drive any meaningful growth overseas over the last 3 years, where rising costs have been a problem as well.

This also is why the stock still looks overvalued using several metrics. Prices remain high even though the rate of inflation has come down, and the impact of the labor shortage and higher energy costs is likely to continue. UPS raised prices by nearly 6% so far this year after increasing rates by nearly 7% in 2023, and with increased competition from Amazon and volumes currently falling, the company won’t likely be able to continue to raise fees at this level moving forward. Analysts are also predicting just 4-5% revenue growth for UPS over the next several years as well.

UPS currently trades at 17.93x expected forward GAAP earnings and 15x predicted forward EBIT even though the carrier has seen revenues and earnings per share continue to decline over the last several years. A company growing revenues at just 4-5% a year should not be trading with a growth multiple, and UPS also faces longer-term and shorter-term headwinds such as increased competition from Amazon and costs. UPS has seen a notable slowdown in shipping volume, and the company has also been dealing with falling revenue per package since the carrier over the last year. Management’s recent conservative full-year guidance for 2024 also shows that the current strategy the company is pursuing isn’t likely to deliver the growth the market is pricing in at UPS’s current multiple of nearly 18x predicted forward GAAP earnings.

Amazon recently surpassed UPS as the largest carrier in the US, and the company has built a huge fleet of trucks that positions the online retailer well to compete with UPS. Amazon also has far more cash to invest in the business than UPS. UPS is also facing higher energy and labor costs, the current plan by management to rely more on automation for package sorting doesn’t materially change the company’s dependence on unionized labor. Given the headline risk UPS faces and the slowing revenue and EPS growth the company continues to see, this stock should not be trading at more than a multiple of 12-14x expected forward earnings, this is not a growth stock.

UPS’s earnings per share have been declining over the last three years despite management initiating a $5 billion dollar buyback last year that has not added shareholder value. While management has raised the dividend by 10% per year over the last decade, the stock has struggled since 2021. While some analysts are projecting mid-double digit EPS growth for the company over the next several years, these estimates are likely far too high with labor and energy costs remaining very high and competition from companies such as Amazon picking up. The carrier has not been able to drive any meaningful revenue growth for years now, and UPS is relying on the share buyback to deliver modest EPS growth. Management’s heavy, aggressive recent dividend raises also indicate the company is having trouble finding ways to invest capital in the business or to find meaningful acquisition opportunities.

Recessions and inflationary periods often force management teams to make tough choices, and these challenging times usually show who the best-run companies are. UPS’s management team has failed to drive any meaningful growth in the US or abroad during the last several years, and the current difficult operating environment is likely to endure for some time. While the carrier’s leadership team is committed to returning value to shareholders, investors should be able to find better value elsewhere.