Thursday's looking pretty bleak for investors in United Parcel Service (UPS +0.34%) stock, down 5.5% through 10:35 a.m. ET despite beating on earnings this morning.
Heading into its third-quarter 2023 report, analysts had forecast that UPS would earn only $1.52 per share for the quarter, but UPS actually earned $1.57 per share, (adjusted for one-time items, making this a non-GAAP number). That's the good news. The bad news is that UPS was also supposed to do $21.4 billion in revenue last quarter, but it only did $21.1 billion -- hence, an earnings beat paired with a sales miss.
NYSE: UPS
Key Data Points
UPS by the numbers
And the news gets worse. Sales at UPS declined 13% year over year in Q3, but because UPS has such high fixed costs, when revenue starts declining, its profits tend to decline even faster. UPS's adjusted earnings in Q3 were barely half what it earned a year ago. And when calculated according to generally accepted accounting principles (GAAP), UPS's earnings were even weaker -- just $1.31 per share, or 56% below Q3 2022 levels.
UPS blamed the decline in GAAP earnings in part on "a one-time payment of $46 million to certain U.S.-based non-union part-time supervisors, transformation and other charges of $70 million, and non-cash goodwill impairment charges of $103 million" -- resulting in the gap between GAAP and non-GAAP numbers. More generally, though, UPS CEO Carol Tome lamented that "unfavorable macro-economic conditions negatively impacted global demand in the quarter," which explains the decline in UPS's sales and much of the decline in profits.
What comes next for UPS
Worse still, this situation doesn't seem to be improving. Turning to guidance for the remainder of this fiscal year, UPS warned that full-year revenue will range from only $91.3 billion to $92.3 billion.
Taken at the midpoint that's about $1.2 billion less than the $93 billion UPS had previously forecast -- including both the $300 million shortfall from Q3 and a further implied $900 million shortfall in the fourth quarter currently underway. It's also less than Wall Street was hoping to see ($92.8 billion), meaning that as things stand today, UPS is heading full speed toward a second earnings miss in Q4. And it means that UPS sales will be down about 8.5% this year compared to 2022.
Now, UPS did not say what its earnings will be in Q4, or for the year. But as we saw in Q3, any decline in top-line revenue is probably going to cause a much, much bigger decline in bottom-line profit. At last report, Wall Street analysts polled by S&P Global Market Intelligence were forecasting $9.09 per share for UPS this year, which would value the stock at about 15.5 times current-year earnings. Now, however, I think we have to assume earnings will be lower, and the P/E higher, before all's said and done.
Even with its generous 4.4% dividend yield, I'd avoid UPS stock for the time being until it's clear how bad the damage will be next quarter.
