UPS (UPS +2.60%) management set out its targets for 2026 during its investor day event in March, and they will serve as a guidepost for investors. The question is not whether UPS will be a good value at current prices if it hits those goals, but whether it will achieve its aims. Here's what you need to know about the company's plans for the next three years.
UPS is in recovery mode
Amid a challenging 2023 during which delivery volumes were lower than expected, UPS also engaged in a protracted labor contract negotiation. As its difficulties coming to an agreement with the Teamsters Union dragged on -- nearly culminating in a nationwide strike of UPS workers -- some customers diverted their shipping to other logistics providers out of fear that they would suffer should a strike occur. The contract that came out of those negotiations raised UPS' labor expenses.
NYSE: UPS
Key Data Points
Let's consider how that added pressure impacted its first-quarter 2024 results.
The 1.5% increase in compensation and benefits meant operating expenses only declined by 1.4% -- bad news when declining volumes pulled down revenue by 5.3%. But its adjusted operating profit fell by a whopping 31.5% in the first quarter.
Still, as previously discussed, that 31.5% decline was better than the 40% decline forecast by former CFO Brian Newman in late March.
| Metric |
Q1 2023 |
Q1 2024 |
% Change |
|---|---|---|---|
|
Consolidated average daily package volume |
22 million |
21.2 million |
(3.6%) |
|
Revenue |
$22.9 billion |
$21.7 billion |
(5.3%) |
|
Compensation and benefits expenses |
$11.4 billion |
$11.6 billion |
1.5% |
|
Total operating expenses |
$20.4 billion |
$20.1 billion |
(1.4%) |
|
Consolidated adjusted operating profit |
$2.55 billion |
$1.75 billion |
(31.5%) |
Data source: UPS presentations.
The investment case for UPS stock
The bulls' case for UPS emphasizes that the company will pass an inflection point in 2024 as the company laps the period when its compensation costs increased, and as volumes return to year-over-year growth as it wins back the business it lost during its contract dispute. Indeed, management forecasts that in the second half of 2024, adjusted operating profits will increase by 20% to 30% year over year.
An increase in delivery volumes should help to reduce overcapacity in the industry and help UPS grow its revenue per piece over the next few years. On the cost-per-piece side of the equation, management believes its investments in automation and smart facilities will enable UPS to keep costs in check by consolidating facilities. In addition, these technological investments mean UPS can expand capacity via productivity initiatives rather than purely through investment in new facilities.
UPS also continues to focus on growing revenue in the higher-margin targeted end markets of small and medium-sized businesses (SMB) and healthcare logistics. Management aims to increase its penetration of the U.S. SMB market from 29% in 2023 to 40% over time. In healthcare logistics, management plans to double its revenue from $10 billion in 2023 to $20 billion in 2026.
Management expects these growth, productivity, and cost initiatives to result in the following in 2026.
|
Metric |
2023 |
2026 Target |
|---|---|---|
|
Revenue |
$91 billion |
$108 billion |
|
Adjusted operating profit |
$9.9 billion |
$14.3 billion |
|
Adjusted operating profit margin |
10.9% |
13%-plus |
|
Free cash flow |
$5.2 billion |
$7 billion |
Data source: UPS presentations.
Can UPS hit its targets?
UPS' healthcare logistics and SMB plans are ambitious, but also in line with the excellent trends the company has established. For example, its increase in U.S. SMB penetration from 27% in 2021 to 29% in 2023 resulted in a 12% increase in revenue per piece, and its fast-growing healthcare logistics revenue comes with higher-than-average margins.
In addition, its technology investments make sense and will help lower costs -- UPS will cut 12,000 jobs this year to reduce costs by $1 billion. Furthermore, the plan's greater reliance on boosting revenue per piece than on volume increases aligns with management's focus on growing its most profitable revenue streams rather than purely chasing volume growth.
Image source: Getty Images.
That said, the one area of concern is an oversupply of capacity in the U.S. small package delivery market (following the capacity expansion that logistics providers engaged in during the high-demand years of pandemic-necessitated lockdowns and social distancing). UPS is relying on demand to catch up. That could take some time, particularly if economic growth disappoints. However, since that risk is front-end loaded into the three-year plan (meaning the most significant risks are in the near term due to the current levels of overcapacity), the stock will be highly attractive if UPS can deliver a quarter or two of results in line with expectations.
