UPS (UPS.US) expects its earnings to improve in the fourth quarter, but Wall Street is not buying it. Morgan Stanley maintains its "reduce" rating.
1min read Wise Alpha noticed that UPS (UPS.US) losses accelerated after a disappointing second quarter, making it the worst-performing stock in the S&P 500 index on Tuesday.
UPS, which reported a nearly 30% year-over-year decline in adjusted profit after adjusting for higher labor costs due to a new labor union contract with drivers and consumers shifting to cheaper shipping options, saw its CEO Carol Tomé call the impact "bathtub effect," where labor costs related to contracts increase first. This led to a sharp decline in earnings in the first half of 2024, with earnings expected to rebound in the second half.
Tomé said on the company's earnings call with analysts: "While we still expect strong earnings growth in the second half of this year, the growth rate will not be as high as we had forecast earlier this year."
Morgan Stanley's Ravi Shanker wrote in a post-earnings report that while the risks to second-quarter profits and challenges in the second half were well known, the magnitude of the earnings cut, along with the ongoing earnings cut that began in August last year, "may further reset expectations."
The company also highlighted its strategic moves to boost profitability, including selling its Coyote Logistics business to RXO, which would free up cash to restart its stock buyback program. The acquisition of Estafeta "cemented UPS's leadership in North America," with 325,000 deliveries per day in its 145 plants in Mexico. The company expects its Supply Chain Solutions segment to generate more than $7 billion in revenue and have an operating margin in the high single digits in the second half.
However, this did not account for the possibility of a global economic slowdown. Evercore ISI analyst Jonathan Chappell said a global economic slowdown would not only dampen sales, but "begin to dampen the recent improvement in pricing and margin expansion."
Morgan Stanley said macro risks to the ground business were greater, along with increasing competition in the parcel space, and added the bearish guidance, maintaining a "reduce" rating and a $100 target price on UPS.