It's been a challenging year for UPS (UPS 0.75%) and its shareholders. The stock is down more than 21% over the last year and down 14% in 2024 as the company continues to face declining delivery volumes and challenging comparisons with previous periods due to elevated costs, including higher labor costs, resulting from a new contract agreed to last year. Still, stocks are often a great value when companies build a recovery from a seemingly difficult position.
UPS is on the road to recovery
UPS' 2024 business is a tale of two halves. Management expects its adjusted operating profit to decline by 20% to 30% in the first half compared to the same period in 2023. The second-half adjusted operating profit is anticipated to increase by 20% to 30%.
The dramatic difference in performance comes down to expectations for delivery volume growth to turn positive (see chart below) and for revenue per piece to outperform cost per piece in the second half. It's not only that industry volumes are improving; UPS is also winning back customers lost to last year's protracted labor dispute -- costumers diverted volumed in fear of strike action.
Moreover, the higher costs associated with the new labor contract made it difficult for UPS to cut overall costs even as revenue continued to decline in the first half of 2024. Since UPS will begin to lap these cost increases in the second half, the comparisons will get a lot easier.
In addition, UPS is cutting 12,000 jobs this year and aims to cut $1 billion in costs. Management has already told investors that the cost-saving impact will be "back-end weighted" in 2024.
Data source: UPS presentations. Chart by author.
As such, UPS' second-half financial outlook will be much better, and investors will start to pencil in assumptions for ongoing improvement in 2025. Indeed, Wall Street analysts have UPS generating $8.22 per share in 2024 and then increasing by 19.5% to $9.82 per share in 2025. For reference, the latter figure would put UPS on a valuation of less than 14 times 2025 earnings.
UPS' medium-term plans
However, UPS' recovery story is not just a near-term one. Management recently held an investor day and outlined its medium-term growth plan and financial targets for 2026. Investors can have confidence in large parts of the plan as the plans involve continuing its highly successful targeted strategy of growing revenue in its healthcare and small and medium-size business (SMB) end markets. These are higher-margin end markets for UPS, and focusing on them is part of management's strategy of aiming to maximize the profitability of deliveries rather than chasing volume per se.
Furthermore, the company plans to invest in technology, notably automation smart facilities. The IT investments will improve productivity, enabling UPS to cut costs by consolidating facilities.
It's a compelling proposition, and management sees a pathway to generate $14.3 billion in adjusted operating profit in 2026 from $9.9 billion in 2023, an annualized increase of 13%.
The main risk to the targets is that the U.S. small package delivery market remains in a period of overcapacity, and UPS is relying on significant increases in revenue per piece to get hit its targets.
However, if you look closely at the chart above, you'll see that revenue-per-piece growth was excellent until delivery volumes fell sharply in 2023. As such, provided volumes come back as management expects, it's reasonable to expect revenue per piece to grow again, mainly due to its focus on healthcare and SMBs.
Image source: Getty Images.
Is UPS stock a buy?
On balance, I think the answer is "yes," although it's probably a stock in which investors should take a small position first before building a larger one. If delivery volumes come back in 2024 and UPS wins back customers, it will likely hit its 2024 earnings targets. A snapshot of the company in the second half will show a company with double-digit earnings growth momentum.
On the other hand, any deterioration in delivery volumes could derail its revenue-per-piece growth plans, particularly when the industry is in overcapacity. UPS is a buy, but investors need to monitor events.
