The company’s first-quarter earnings helped restore confidence in its full-year guidance.
UPS (UPS 0.14%) investors got what they wanted from the company’s recent first-quarter earnings report. The market was left unimpressed after management’s investor and analyst day in late March when management laid out its three-year strategic aims and financial targets. However, the latest earnings helped restore confidence in those targets. Still, is it enough to make the stock a buy? Here’s the lowdown.
UPS cheers the market
It’s never a comfortable situation when a company unveils three-year financial targets and then, in the same presentation, provides insights on the Q1 trading that could potentially challenge its full-year guidance. This was the case with UPS, and the market reacted quickly.
As previously outlined, CFO Brian Newman shocked the market on the investor & analyst day when he told investors to expect a 40% decline in adjusted-operating profit in Q1 (due to close a few days after the presentation). According to my calculations, this would result in about $1.5 billion in adjusted-operating profit in Q1 when the Wall Street consensus at the time was $1.75 billion.
Moreover, even meeting the first-half guidance for a 20% to 30% decline compared to the first half of 2023 would mean hitting $2.3 billion to $2.9 billion in Q2, implying a hefty step up from Q1’s $1.5 billion.
Given management’s guidance for Q1, the market was already prepared for a second-half earnings recovery at UPS, but perhaps not quite one of this magnitude.
What happened in the first quarter?
Fast-forward, and instead of a 40% decline in adjusted-operating profit, management reported a 31.5% drop to $1.75 billion — a figure in line with the previous Wall Street consensus.
Image source: Getty Images.
Inevitably, the subject was the first one addressed on the earnings call. CFO Brian Newman said two factors “contributed to beating that 40%.” First, Newman noted that UPS saw positive momentum on delivery volumes going through the quarter when “the last couple of weeks were basically breakeven from a volume perspective.” For reference, the overall average daily volume was down 3.6% in Q1.
Second, the “bigger component,” according to Newman, was “just some cost trading between April and March, things like occupancy and maintenance cost shift in terms of when they hit the P&L between March and April.”
A cynic might argue that management might have found a way to push some costs into April that might have fallen in March. Still, the most critical driver of UPS’s improvement in 2024 and its second-half growth story will come from a volume improvement, and here, investors can take heart.
Image source: Getty Images.
UPS’s improving volumes
Management expects its U.S. domestic package-volume growth to be “slightly positive” in Q2. Meanwhile, with regard to the international business, management is “looking to see that business improve as we sequentially move over the course of the year.”
As such, the improving volume outlook led management to reaffirm its full-year guidance for revenue of $92 billion to $94.5 billion and adjusted operating-profit margin of 10% to 10.6%.
Moreover, management took the time to reaffirm its three-year target to reach $108 billion to $114 billion in revenue by 2026, with a consolidated operating margin of 13%, and outlined improvements in its small and medium-sized business (SMB) and healthcare offerings to help it get there.
In addition, CEO Carol Tome said its recently announced deal to become the main air-cargo provider for the United States Postal Service (USPS) would be “margin accretive. It will be EPS accretive beginning in year one and through the life of the contract.”
Image source: Getty Images.
A stock to buy?
Despite delivering earnings ahead of internal expectations in the quarter, management refrained from raising its full-year guidance. While that might be superficially surprising, a look at why UPS exceeded those expectations provides clarity. If some costs are pushed into April (the second quarter) from March (the first quarter), then, in reality, UPS is relying on an improving-volume environment (relative to prior expectations) to justify raising its full-year guidance.
Given the difficulty of precisely predicting volume growth, it’s understandable if management was hesitant to raise full-year guidance, particularly as the Q1 “beat” was mainly down to a factor that isn’t likely to repeat. That said, year-over-year volume growth is clearly improving, and investors can feel a bit more comfortable in management’s full-year guidance as a consequence. All told, the 4.4% yielding stock is a pretty good option for investors looking for a sustainable and substantial dividend play while they hope for a second-half earnings recovery.
