The package delivery stock’s recent earnings gave investors reason to believe the best is yet to come for the company.
UPS (UPS -0.63%) stock received another upgrade, with an Argus analyst slapping a $150 target on it and upgrading the rating from hold to buy.
UPS finally delivers
Part of the optimism from the Argus analyst and others comes from the recent results, which halted a run of disappointing earnings reports. Management overestimated delivery volumes in 2023, and its second-quarter 2024 earnings report was little short of embarrassing. For example, management slashed its implied full-year adjusted operating profit guidance to $8.74 billion after giving implied guidance of $9.2 billion to $10.02 billion just a few months ago on its investor day presentation in March.
That said, in the third quarter, the transportation company lowered its full-year revenue guidance to $91 billion from $93 billion previously but raised its margin guidance, so the full-year adjusted operating profit guidance was maintained.
UPS is muddling through
In a nutshell, UPS did a good job of generating margin expansion by driving cost per piece lower while increasing delivery volumes, albeit with lower revenue per piece deliveries that might not be entirely consistent with its “better not bigger” operating framework. The framework implies focusing on targeted end markets like small and medium-sized businesses (SMBs) and healthcare and a willingness to forego lower-margin deliveries.
While the shift in delivery mix is far from ideal, there’s little UPS can do about the weak economic environment. In addition, the industry continues to work through the overcapacity that built up during the booming demand periods of lockdowns.
Image source: Getty Images.
In this context, UPS’ third-quarter performance was a welcome return to form, and it’s encouraging Argus and others to believe UPS is pulling the levers on costs to drive margins higher while the industry slowly adjusts capacity to fit the demand environment. The latter will improve the industry’s pricing environment, ultimately leading to improved revenue per piece and profitability.
As such, UPS is an attractive stock to buy, as it appears to be on the road to recovery.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
