United Parcel Service Inc. (UPS) announced its second-quarter results today, with a profit that exceeded expectations but revenue that fell short. The package delivery company also revised down its full-year revenue guidance and operating margin outlook.
Better-than-Expected Profit Margin Despite Volume Declines
Despite experiencing volume declines, UPS Chief Executive Carol Tomé highlighted that the company was able to maintain a consolidated operating margin of 13.2%, surpassing expectations. This achievement was attributed to effective cost controls implemented by the company.
Stock Performance and Revised Outlook
Following the release of the earnings report, UPS's stock faced a minor decline of 1% in afternoon trading, after initially experiencing a larger intraday loss of 3.4%. Prior to the market opening, the stock fell as much as 7.4% in the premarket.
Chief Financial Officer Brian Newman explained during the call with analysts that there were two main factors contributing to the revised outlook.
Labor Negotiations and Volume Diversion
The negotiations with the Teamsters union resulted in greater-than-expected volume diversion during the second quarter and extending into July. This ultimately led to a lower volume ramp-up for the remainder of the year, starting from a reduced base volume level following the tentative agreement.
Overall, while UPS surpassed profit expectations, challenges in labor negotiations and volume diversion have prompted the company to revise its revenue guidance and operating margin outlook for the year ahead.
FedEx Faces Challenges with UPS and Teamsters Union
According to FedEx, the ongoing friction between the Teamsters union and UPS has presented new opportunities for their business. However, this comes amidst some challenges for the company.
One of the main issues is the higher-than-planned wage-rate increases in the new labor agreement, which has resulted in increased expenses for FedEx's U.S. operations and a reduced margin outlook.
Jefferies analyst Stephanie Moore believes that the recent guidance downgrade is due to the noise created by labor negotiations. She predicts that the stock will remain in the "penalty box" until investors have a clearer picture of the 2024 margin outlook. Despite this, Moore maintains a buy rating on UPS shares.
David Vernon from Bernstein also acknowledges the negative impact of contract uncertainty on UPS's volume. However, he highlights the company's successful cost controls and improved management of operating leverage. Vernon reiterates his outperform rating on UPS.
Year to date, UPS shares have gained 3.7%, while FedEx Corp. shares have skyrocketed by 55.6%. In comparison, the Dow Jones Transportation Average has climbed 21.8%, and the Dow Jones Industrial Average has increased by 6.2%.