The upcoming earnings report of United Parcel Service (UPS) is expected to shed light on both the state of the economy and how businesses are grappling with increased costs resulting from recent labor agreements.

Third Quarter Expectations

For the third quarter, analysts on Wall Street have forecasted earnings per share (EPS) of $1.52, with sales reaching $21.4 billion. In comparison, UPS reported EPS of $2.99 and sales of $24.2 billion during the same period last year.

Understanding the Drop in Earnings

The substantial year-over-year decline in earnings can largely be attributed to the effects of a newly ratified labor contract with the Teamsters union, finalized in August.

UPS explains that a portion of its shipment volume has shifted away from their network. This response is understandable since businesses, concerned about the possibility of a strike, took precautions to safeguard their operations. Furthermore, UPS management has indicated that certain cost increases associated with the new contract are heavily concentrated at the contract’s outset.

Fourth Quarter Outlook

Although Wall Street predicts a significant rebound in the fourth quarter, with projected EPS of $3, Citi analyst Christian Wetherbee raises doubts about this optimistic outlook.

“We remain cautious regarding our fourth-quarter EPS estimate of $2.75, as the implied progression of sustained 2023 guidance appears overly hopeful. We would prefer to see tangible evidence of volume returning to UPS’s network,” Wetherbee stated in a report after analyzing UPS’s labor contract update.

Overall, UPS’s upcoming earnings report will provide crucial insights into the current economic landscape and how companies are adapting to the challenges associated with new labor agreements.

UPS Faces Labor Issues, But Can It Catch Up to FedEx?

Wetherbee rates UPS shares at Buy, with a revised price target of $180, down from $200 per share. This comes after the recent update.

Conference Call for Investors

Management is set to hold a conference call at 8:30 a.m. Eastern time to discuss the financial results. Shareholders are eager to hear about the company’s performance going forward.

Investor Sentiment Weighed Down

For quite some time, labor issues have been taking a toll on investor sentiment. Over the past year, UPS shares have witnessed a decline of approximately 13%. On the other hand, the S&P 500 and Dow Jones Industrial Average have seen gains of about 9% and 4% respectively. Meanwhile, FedEx (FDX) shares have surged by approximately 52% during the same period.

Timing and Stock Performance

Part of the discrepancy in UPS and FedEx stock can be attributed to timing. FedEx shares have increased by around 12% in the past five years, whereas UPS shares have grown by approximately 40%.

Labor Costs and Outlook

In recent years, UPS has managed to achieve higher profit margins and has benefited from slower wage inflation. The company’s labor contract, signed before the pandemic, included planned wage increases. Presently, FedEx seems to have an edge.

However, in the long run, there shouldn’t be a significant difference in labor costs between the two companies. This is how things are expected to pan out.

Leave a Reply

4  +  2  =