UPS reported mixed second-quarter financials Tuesday, announcing its recent labor deal could reduce 2023 revenue. UPS stock dropped Tuesday.
UPS expects full-year consolidated revenue to be down 4% vs. its Q1 forecast with the company's 2023 adjusted operating margin also coming under pressure due to the tentative collective bargaining agreement with workers.
UPS stock tumbled 3% to 176.40 Tuesday during market trade. On Monday, shares edged up 0.7% to 182.13. Ahead of Tuesday trade, UPS stock was up 4% so far in 2023.
Ahead of Q2 earnings, analysts rang warning bells on the recently reached labor deal, which averted a potential strike.
On July 25, UPS announced the deal with the International Brotherhood of Teamsters on a new five-year contract. The tentative agreement wrapped up less than a week before expiration of the current contract. It also averted a potential strike set for August 1.
However, union members must still approve the agreement. UPS workers began voting on the new contract last week. The process runs through Aug. 22.
Under the proposal, full-and part-time union workers will get $2.75 more per hour in 2023, and $7.50 more by the end of the five-year contract. The agreement also includes a provision to increase starting pay for part-time workers from $16.20 per hour to $21 per hour. The average pay for part-timers at UPS had been $20.
UPS called the labor deal a "win-win-win" Tuesday in its Q2 earnings release.
"UPS is stronger than ever. Looking ahead, we will stay on strategy to capture growth in the most attractive parts of the market and make our global integrated network even more efficient," UPS Chief Executive Officer Carol Tomé said in a statement Tuesday.
UPS Stock: Q2 Earnings And The Labor Agreement
Estimates: Wall Street predicted EPS falling 24% to $2.49 with sales contracting 7% to $23.04 billion.
Results: UPS reported earnings falling 23% to $2.54 per share in Q2. The delivery giant announced revenue decreased 11% to $22.05 billion.
UPS sales in the U.S. fell 7% in the second quarter. The company said this was driven by a 10% decrease in average daily volume. Internationally, sales decreased 13% due to a 7% reduction in average daily volume and "continued softness on Asia trade lanes."
The company's full-year outlook is now taking into account "the volume impact from labor negotiations and the costs associated with the tentative agreement reached with the International Brotherhood of Teamsters."
UPS expects 2023 consolidated revenue to be about $93 billion with an adjusted operating margin of around 11.8%. At the end of Q1, UPS predicted consolidated revenue of around $97 billion and adjusted operating margin of about 12.8% in 2023.
The company also reaffirmed plans for 2023 capital expenditures to be around $5.3 billion, dividend payments to be $5.4 billion and share repurchases to be about $3 billion.
Analyst Concerns
Following the announcement of the tentative agreement, Morgan Stanley analyst Ravi Shanker wrote on July 25 that "an early look at the deal's terms implies potential financial headwinds for UPS."
"Investors will be pleased to see an agreement but the actual terms may come as a negative surprise," Shanker said.
"Bulls may believe that UPS can price for any inflation," Shanker added. "But we think this might be difficult given macro conditions, structural changes in the parcel delivery market and competitive risk."
Meanwhile, Credit Suisse downgraded UPS to a neutral rating after UPS announced the deal. However, the brokerage also raised its price target to 204, from 200. That's about 12% above where UPS shares traded Monday.
The firm said it moved to a more cautious stance on UPS stock due to concerns that terms of the labor agreement may add considerable pressure to UPS' cost structure.
Stifel on July 26 raised its UPS stock price target to 203, from 202, and maintained a buy rating. The labor deal is "a win for both organizations," according to Stifel. The firm added the wage increases will be a modest headwind to earnings.
Shipping Hurdles
The freight and delivery industry has been sending mixed signals so far this earnings season. On Friday, international freight logistics leader XPO reported a smaller-than-expected drop in second-quarter profit Friday amid a "soft industry environment for freight transportation."
Meanwhile, UPS-rival FedEx posted mixed fiscal fourth-quarter results in late June. FedEx reported a 28% earnings drop to $4.94 per share while revenue fell 10.2% to $21.9 billion. FactSet analysts expected would dive to $4.85 per share on $22.55 billion in sales.
FDX full-year earnings tumbled 27% to $14.96 per share while revenue slipped 3.5% to $90.2 billion.
For the 2024 fiscal year, FedEx guided earnings from $16.50 to $18.50 per share on flat to low single-digit revenue growth.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
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