Uncovering UPS (UPS) Growth Potential: Labor Costs, B2B Expansion, & Tuesday's Earnings

In the wake of FedEx's (FDX) recent Q4 earnings report, all eyes are on UPS (United Parcel Service) as it prepares to reveal its Q2 earnings tomorrow. While the stock has been trading at a discounted valuation, FedEx's growth turnaround provides a glimmer of hope for investors assessing UPS's prospects.

UPS's guidance for 2024 suggests a business on the mend. With revenue expectations ranging from $92.0 to $94.5 billion, the company aims to maintain a consolidated operating margin of 10.0-10.6%. Despite a challenging first half due to the ongoing impact of the Teamsters contract, UPS anticipates a positive second half, with the US operating margin forecast to stabilize at 10%.

Q1 results were a mixed bag, with revenue down 5.3% year-over-year but a stronger-than-expected EPS. Labor costs weighed on operating profit, but UPS's productivity gains and improved daily volume trends in both the US and international markets indicate resilience. The USPS air cargo contract further bolsters the company's B2B strategy, aligning with its growth objectives.

FedEx's Q4 report, showing its first revenue growth in six quarters, may have raised hopes for a similar turnaround at UPS. However, the stock's tepid response to FedEx's news suggests lingering skepticism among investors. UPS shares remain close to 52-week lows, reflecting ongoing concerns about labor costs and the company's valuation.

As UPS enters its earnings call, investors will be keen to understand how the company is weathering contract negotiations and leveraging its network improvements. Any signs of operational efficiency gains, cost management, or successful execution of its B2B strategy could provide a positive catalyst for the stock.

While UPS faces short-term headwinds from labor costs, its long-term growth prospects remain intact. With a focus on B2B expansion and the potential for improved operational performance, investors should carefully weigh the company's earnings report against the broader market narrative. For those seeking a contrarian play, a well-informed assessment of UPS's Q2 results could reveal an undervalued investment opportunity.