UPS' (UPS 0.14%) management didn't get the response to the Investor Day presentation it would have liked. It probably thought its presentation would focus investor's minds on its three-year financial targets and its strategic initiatives (such as growing its small and medium-sized business and healthcare revenue while investing in technology to improve productivity).
What happened with UPS
Instead, many investors were left doubting the viability of its full-year 2024 guidance. A Deutsche Bank analyst maintained a "buy" rating on the stock but lowered the price target to $179 from $183 and noted the significant profit increase needed to meet its guidance through 2024.
The analyst has a point. While there was no change to the full-year guidance (management still expects adjusted year-over-year operating profit to be down 20%-30% in the first half and up 20%-30% in the second), investors were left surprised by CFO Brian Newman's guidance to expect adjusted operating profit to fall 40% year over year in Q1.
That means UPS will report $1.5 billion in adjusted operating profit in the first quarter and needs to improve adjusted operating profit by 50%-86% quarter over quarter in Q2 to meet the guidance of a 20%-30% decline in the first half compared to the first half of 2023.
Naturally, when the market doubts UPS's 2024 targets, it will also think twice about its three-year financial targets. Management plans to improve adjusted operating profit from $9.9 billion in 2023 to $14.3 billion to $14.9 billion in 2026, driven by significant increases in revenue per piece. Still, given the competitive nature of the marketplace, the targets are somewhat more open to question than relying on internal cost-cutting initiatives.
Given the Q1 guidance, it's understandable if analysts are less bullish. Still, management should be given the benefit of the doubt over the three-year targets as it has a good track record of raising revenue per piece. The revised Deutsche Bank target implies a nearly 22% price rise over the next 12 months. Maintaining the buy rating and the price target cut makes sense.
