UPS Earnings: Q4 Package Margins Disappoint; Management Tempers Guidance

UPS Stock at a Glance

Fair Value Estimate: $179.00

Star Rating: 3 stars

Uncertainty Rating: Medium

Economic Moat Rating: Wide

UPS Earnings Update

UPS’ UPS first-quarter top line fell 5% year over year (removing foreign exchange), below our forecast on lower-than-anticipated U.S. domestic package activity. Relative to first-quarter 2022, the revenue decline stems from falling package volumes along with rate and demand normalization for the truck brokerage and global forwarding operations, partly offset by higher fuel surcharges and core pricing gains in the package segments (adjusted package yield was up about 4.5%).

Total average daily package volume declined 5.5% on less business from Amazon (revised contract), normalizing e-commerce activity, retail sector inventory destocking, easing U.S. industrial production, and less robust macroeconomic conditions across Europe. We suspect UPS has also been unable to convert some of its potential new business pipeline because of shipper concern over union negotiations.

UPS Margins Hold Up Well

Margins had been holding up surprisingly well throughout the second half of 2022, with help from solid execution on the productivity front and strong yield gains, but continued volume declines are taking a toll. Consolidated adjusted operating margin fell 240 basis points, to 11.1%, with all segments trailing our expected run rates. Additionally, full-year margin guidance came in worse than we anticipated, and we suspect it fell short of buy-side expectations, as well.

We expect to lower our DCF-derived $179 fair value estimate by 1% to 3%, as we will be tempering our medium-term U.S. and international margin forecasts. Note that we remain cautious regarding the Teamsters union negotiations, which we suspect will prove contentious and could yield wage hikes that are meaningfully higher than we are baking in. The shares look appropriately valued relative to our longer-term revenue, margin, and free cash flow growth assumptions.