United Parcel Service's Fourth-Quarter Earnings Reflect Economic Outlook

United Parcel Service (UPS) is set to report its fourth-quarter earnings, offering valuable insights into the state of the economy as a new year begins.

Overview

Wall Street anticipates UPS to announce an operating profit of $2.8 billion and earnings per share of $2.44 from sales totaling $25.4 billion for the quarter.

A Year Ago

Comparatively, during the same period last year, UPS reported an operating profit of $3.2 billion and earnings per share of $3.62 from sales amounting to $27 billion.

Factors Affecting Results

Several factors have contributed to the anticipated decrease in earnings. Weaker volumes due to a slowing economy represent one aspect. Additionally, labor negotiations have played a significant role, leading some businesses to leave the UPS network in order to avoid potential work stoppages.

While UPS successfully averted a strike with the Teamsters union, the new labor agreement has presented another challenge. Workers have received substantial wage increases to counteract high inflation experienced in recent years.

Balancing Labor Costs

Addressing the labor cost pressures can be challenging for UPS, as raising prices abruptly is not a feasible solution. Instead, the company plans to gradually increase prices over time, which should help restore profit margins to previous levels.

In 2022, UPS achieved an operating profit margin of nearly 14%. However, estimates suggest that margins will dip slightly below 11% in 2023. Wall Street projects a gradual improvement of approximately 0.5 percentage points annually over the next three years, aiming to reach around 12.5% by 2026.

Future Projections

For 2024, analysts anticipate an operating profit margin of approximately 11.3% and an operating profit of $10.7 billion from sales totaling $95.7 billion.

Initially, UPS projected an operating profit of around $13 billion from sales of $98 billion for 2023. However, updated guidance in October adjusted these figures to approximately $10.1 billion and $92 billion, respectively, due to the prevailing economic conditions and labor cost headwinds.

Conference Call and Market Expectations

Following the release of the earnings report, UPS will host a conference call at 8:30 a.m. Eastern Time to discuss the results.

Options markets indicate that the stock is expected to fluctuate approximately 5% following the earnings announcement. In the past four quarterly reports, UPS shares have similarly experienced fluctuations of approximately 5%, rising once and falling three times.

Performance and Market Comparison

Over the past 12 months, UPS stock has observed an 11% decline. In contrast, the S&P 500 and Nasdaq Composite indices have recorded gains of approximately 23% and 37% respectively during the same period.