It's been tough going for United Parcel Service (UPS 0.18%) and its shareholders lately. The stock has declined by 27% since the start of 2023. Much of the reason is the effect of declining delivery volumes in its core U.S. domestic package market. Here's what happened, and why investors should closely monitor matters when considering a position in the stock today.
Volume declines
The volume declines are particularly problematic as they came after exceptional growth driven by the lockdown periods. That growth encouraged package delivery companies to expand supply, creating a significant capacity surplus in 2023 as supply expanded, and a slowing economy caused a decline in demand.
NYSE: UPS
Key Data Points
As the chart below demonstrates, the steep drop in volumes in 2023 eventually led to a decline in average revenue per piece. Year-over-year revenue has declined for every quarter since the first quarter of 2023.
Data source: UPS presentations. Chart by author.
The bull and bear debate over UPS
That said, the chart also shows a slight uptick in year-over-year volume growth in the second quarter, and management expects it to build throughout the year.
For the UPS bulls, this is a turning point in the company's prospects, as volume growth will lead to a decline in the industry capacity surplus, creating a better pricing environment.
On the other hand, UPS bears point out that UPS only increased its delivery volumes in Q2 because it took on lower-margin deliveries (note the decline in the chart for the average revenue per piece). That's something UPS' "better not bigger" framework implies it would not do.
Moreover, the company slashed its full-year profit and margin expectations on the Q2 earnings call. That's not a good look. Management only laid out its three-year plans in March, and at the time, it reiterated the full-year guidance it would then cut in July.
Image source: Getty Images.
Where next for UPS?
Cutting full-year earnings expectations so soon after the investor day is a clear sign of near-term pressure on U.S. earnings. Still, delivery volumes are improving, which can't be bad. As such, the stock is attractive for investors who can tolerate the potential for some near-term bad news.
