Shares in UPS (UPS 0.14%) declined by 10.6% in the week to Friday morning, according to data provided by S&P Global Market Intelligence. There are no prizes for guessing why. The company's fourth-quarter earnings report left investors feeling underwhelmed on Tuesday after management gave lackluster guidance for 2024 and warned investors it's likely to get worse before it gets better.
UPS struggles in 2023
It's fair to say last year wasn't an outstanding one for UPS. The company got hit with weaker-than-expected end demand because rising interest rates put a brake on the economy. Not only does this negatively impact the absolute level of demand, it also causes customers to shift to lower-cost alternatives. For example, volume in its lower-cost ground service (with an average revenue per piece of $11.03 in 2023) only declined 6.9% in 2023 compared to a whopping 21.2% fall in volume for its more expensive deferred service ($16.38).
If a weakening economy wasn't enough, UPS lost delivery volumes as protracted labor negotiations caused customers to divert deliveries to other networks for fear of strike action.
It gets worse. The contracts finally agreed upon contributed to UPS' compensation and benefits expenses, which only declined 1.3% in 2023. That's fine in normal circumstances, but it's not good when revenue falls at a 9.3% rate as in 2023. Ultimately, UPS' adjusted operating profit fell 28.7% last year.
What about 2024?
The outlook for this year is a tale of two halves. According to CFO Brian Newman on the earnings call, revenue growth will be 1% to 4% in 2024, but "based on lapping of the volumes and the contract overlap, we would expect revenue to be flat to down 2% in the first half, up 4% to 8% in the back half."
Management is cutting costs by $1 billion by reducing its headcount, and it has ongoing initiatives to improve revenue quality by expanding in the small and medium-sized business (SMB) and healthcare sectors and investing in technology and automated facilities to improve efficiency.
Image source: Getty Images.
Still, if you buy the stock, you should be prepared to wait until the second half of the year before seeing tangible improvement in UPS' growth rates. That's not a problem for long-term investors, and UPS looks attractive at these levels.
