It's fair to say Wall Street reacted lukewarmly to UPS' (UPS 0.47%) first-quarter earnings report. On the positive side, five of them nudged their price targets higher (with BMO Capital taking it to $169). Still, only one has a positive rating on the stock (Oppenheimer's "outperform" rating). The rest remained at "hold/neutral/market perform."
UPS's mixed first quarter
The lack of enthusiasm is understandable. Although UPS beat expectations, it did so after CFO Brian Newman guided the market lower at the investor day presentation in late March -- a few days before the end of the quarter. He told investors to expect a 40% year-over-year decline in adjusted operating profit. I discussed how such a result would pose serious questions about its full-year guidance previously.
However, UPS reported only a 31.5% drop in adjusted operating profit in the quarter, with the "beat" due to a combination of delivery volume improvement late in the quarter and some costs shifting into April from March.
As such, it's hard to get excited about the earnings report, as the final adjusted operating profit figure is what the market had priced in before Newman's update on Investor Day.
A better second half
That said, management reiterated its full-year guidance and its three-year financial targets. Moreover, after declining by 7.5% over the year in the fourth quarter, UPS' consolidated average daily volume was only down 3.2% year over year in the first quarter and should inflect in 2024. Meanwhile, UPS will lap the increase in costs from last year's Teamsters contract, and fuel surcharges should increase revenue per piece.
Image source: Getty Images.
The ongoing development of relationships with small and medium-sized businesses (SMBs) and healthcare customers should help its top line, and planned investments in technology will lead to consolidated locations and improved productivity.
Everything points to UPS' best days lying ahead. Still, it will have to navigate an uncertain volume environment as the industry seeks to absorb excess capacity built up in the boom years of the pandemic. The stock is attractive on balance, but investors must watch for UPS delivery volumes.
