Package delivery giant UPS (UPS +0.45%) is muddling through a difficult period characterized by end-market challenges and self-imposed structural changes to its business. At the same time, however, its stock is down 32%, which has boosted its dividend yield to 7.7%. That offers investors a potential value opportunity that rarely comes around for blue chip stocks. Does all this make the stock a buy before UPS delivers its third-quarter earnings report on Oct. 28?
UPS probably had a difficult third quarter
Management declined to update its full-year guidance in April due to the uncertainty in its end markets created by President Donald Trump's tariffs and other macroeconomic uncertainties. The company chose not to update guidance again in July, citing the volatile macro environment and ongoing uncertainty around tariffs and trade.
"We see a risk for greater variability in SMB [small and medium-sized business] and enterprise volume" in the third quarter, CFO Brian Dykes said on the Q2 earnings call.
NYSE: UPS
Key Data Points
In addition, Dykes said the logistics company's profit margins "could be pressured a little more than we thought earlier in the year, even more than the kind of normal seasonality that we have from Q2 to Q3."
That said, management all but promised to give guidance numbers in conjunction with the third-quarter report, with CEO Carol Tome saying that UPS would have "more certainty" on tariffs, peak (referring to the delivery spikes that occur during the holiday season), and "more certainty on costs" by that time.
The latter point deserves a few words, as part of the uncertainty regarding costs stems from its employee attrition rate being lower than expected, resulting in "higher expense than we planned" in the second quarter, according to Tome.
In normal circumstances, a high attrition rate (a measure of how many employees are leaving a company) is not good news, but UPS is in the midst of deliberately reducing its Amazon.com delivery volumes by 50% from the end of 2024 to the middle of 2026, and Amazon deliveries accounted for 11.8% of UPS' revenue in 2024. In that context of lower delivery volumes, UPS would prefer a higher attrition rate for now, but that's not how matters are playing out.
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What to expect from UPS in the third quarter
It's hard to see how the issues identified as causes of weakness in the first half could be easily resolved. For example, trade tensions between the U.S. and China have re-escalated recently, and the China-to-U.S. trade route is UPS' most profitable. Moreover, even higher tariffs are likely to impact the small and medium-sized businesses (SMBs) that constitute a core and targeted market for UPS.
It's a lot harder for SMBs to quickly change where they source their products from, and dealing with the uncertainties generated by this chaotic trade and tariff landscape is also highly challenging for them. For UPS, all of these pressures are coming as it's scaling back on Amazon deliveries and ramping up its last-mile deliveries through UPS Ground Saver, a service that replaced SurePost at the end of 2024. SurePost was a joint operation under which last-mile deliveries were handled by the U.S. Postal Service.
What's next for UPS
Everything points to Q3 having been another difficult quarter for UPS, and it's reasonable to expect that management will take a knife, or rather a chainsaw, to the initial full-year guidance it gave in January. That guidance called for $89 billion in revenue, an implied operating profit of approximately $9.6 billion, and free cash flow (FCF) of $5.7 billion. However, the current Wall Street consensus (which may prove overly optimistic) calls for $87.5 billion in revenue, $7.8 billion in operating profit, and FCF of $4.6 billion.
Image source: Getty Images.
Is UPS stock a buy?
The case for buying the stock now is based on the theory that the problems identified above will prove temporary, and that the company's end markets should stabilize as its customers become accustomed to the new high-tariff landscape. Meanwhile, the company can continue to grow its healthcare-client-based revenues and continue to make productivity-enhancing investments in technology (smart facilities, automation, etc.).
It's a compelling case, but it's a difficult one to get behind until management resets investor expectations and potentially cuts its dividend to free up funds, as its free cash flow (FCF) won't cover its dividends at their current level this year. Meanwhile, it will have to adjust to the realities of operating during a period of lower demand for its services.
There's no point in investing on this basis, because there's no guarantee that management will take such actions. However, the precedent has been set in recent years, with the former General Electric and, more recently, 3M adopting this approach. It worked.
