Is UPS the Best Transportation Stock for You?

The 4.4% dividend yield at UPS (UPS 0.65%) and the three-year outlook given on the recent Investor & Analyst Day make the stock look extremely attractive, but is it enough to warrant an investment in a company that has faced challenges in the past year? Moreover, there are some question marks around its guidance.

UPS guidance raises questions

There are three interrelated factors to consider:

• UPS missed its initial 2023 guidance.
• Given management's recent comments on the first quarter, UPS has work to do to meet its full-year 2024 guidance.
• The three-year financial targets look ambitious, and at least one Wall Street analyst suggested the market doesn't believe in them.

A cynical viewpoint would conclude that investors are putting faith in optimistic looking medium-term targets in a company that missed guidance last year and is under pressure to meet its 2024 guidance. However, I think that's an overly critical take. Here's why.

What happened in 2023

UPS missed its guidance last year as demonstrated by comparing the third and fourth columns in the table below. Still, note that UPS hit its 2023 targets (given in its Investor Day presentation in 2021) a year earlier in 2022, as noted by comparing the first and second columns.

The variability in UPS performance over the last two years illustrates the difficulties of forecasting delivery volumes. It's not just a question of predicting economic growth (which guides delivery volumes); it's the return to spending on services instead of products caused by removing lockdowns.

If that wasn't enough, the company's high-profile labor-contract negotiations led to significant declines in delivery volumes in 2023 as customers diverted deliveries to other networks in fear of strike action.

Data source: UPS presentations.

While it's never good news for a company to miss guidance, it's fair to say UPS was hit with tough conditions in 2023.

What about 2024?

At the end of the question-and-answer session, CFO Brian Newman provided a negative surprise. UPS maintained the full-year guidance given on the fourth-quarter 2023 earnings call given in late January for adjusted operating profit to fall 20% to 30% year over year in the first half and to grow 20% to 30% in the second half year over year. Newman's forecast that Q1 would see a 40% drop left investors wondering how UPS will hit its full-year guidance.

That figure is significantly below the Wall Street consensus for Q1 and calls upon UPS to hit the consensus for Q2 just to get to the lower end of the first half of guidance.

Data source: UPS presentations

In addition, if UPS is struggling to meet estimates, this could imply that the company is failing to win back customers lost due to the labor dispute in 2023. Winning back those customers is vital to the management's expectation that its volume growth will turn positive in the second half. According to Newman in January, the return to volume growth will be "primarily driven by lapping the volume diversion we experienced in the U.S. last year during our labor negotiations."

What it means for investors

As previously noted, the Q1 guidance is a cause for concern. Still, it's also important to note that these calculations are relative to Wall Street estimates, and management will have a much better look at the cadence of winning back lost customers than analysts have. Management is not responsible for Wall Street estimates, and the earnings "miss" in 2023 is understandable under the circumstances discussed above.

Image source: Getty Images.

Moreover, no one is buying a stock for one-quarter's earnings, and the decline in the share price after the presentation suggests some pessimism is now baked into the stock. On balance, it makes sense to see what management guides toward in its Q1 earnings presentation, probably in late April, before concluding that UPS will miss its initial full-year 2024 guidance. UPS is still attractive, but cautious investors may want to wait and see what management says before buying in.