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Business News/ News / UPS Clears the Decks for Strong Fourth-Quarter Finish
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UPS Clears the Decks for Strong Fourth-Quarter Finish

All signs point to a successful turnaround. How long can investors wait to get on board?

UPS Clears the Decks for Strong Fourth-Quarter FinishPremium
UPS Clears the Decks for Strong Fourth-Quarter Finish

(Bloomberg Opinion) -- The outlook for United Parcel Service Inc. became much clearer on Tuesday after the delivery company reported a steep decline in first-quarter sales and profit: Look for banner results … in the fourth quarter.For investors, this raises a thorny question of timing. UPS shares had dropped 7.6% this year through Monday — compared with a 5% gain for the S&P 500 Index and a 6.8% rise for rival FedEx Corp. — before recovering somewhat on Tuesday. The road to that potential fourth-quarter payoff will be long and bumpy. The second quarter will also be a dud for UPS as it grapples with its most expensive union contract in history, which took effect on Aug. 1, on top of weak parcel demand coupled with too much delivery capacity in the market. These same factors dragged down first-quarter revenue by 5.3% and operating profit by more than 31%. For the second quarter, operating profit will continue to fall, by about 18% based on analyst estimates collected by Bloomberg. Revenue will finally stabilize (and even rise 1.3%, according to estimates) after six quarters of year-on-year sales declines as the industry returns to normal after the pandemic sugar high.

UPS has been cutting costs to make up for its rising labor expenses by shutting down less efficient facilities and paring its management workforce. The company is reaping the benefit from bets on technology to improve productivity and the focus on small businesses and health-care deliveries, which both tend to bring higher prices than the large retailers. Amazon.com Inc., Target Corp. and other large companies command discounts in exchange for volume. UPS has been trying to curb its dependency on these large customers, including its largest customer, Amazon, to help improve margins. That hasn’t been easy during this period of declining demand.

A clear indication that the first quarter is the low point for UPS is that Chief Executive Officer Carol Tomé, a former longtime chief financial officer at Home Depot Inc., dumped about $110 million of write-offs onto the balance sheet, including consolidation of brands from health-care acquisitions and some accounts at the international business.

So, what’s behind the fourth-quarter comeback?

The biggest tailwind for UPS is absorbing the union contract. The labor deal was front-loaded with 46% of annual wage and benefit increases coming in the first year. The second, third and fourth years will be relatively light on the wage increases with the fifth-year wage gain ramping up again. UPS should also recover volume it lost to competitors last year because of concerns about a disruptive strike during tense negotiations. This means that UPS will be reaping nearly the full benefit of the $1 billion of cost cuts that it has planned this year when wage pressures will decline and volume should rebound.

The company also stands to gain from the US Postal Service air-freight contract it wrested from FedEx, which was announced earlier this month. Analyst had been wondering whether UPS lowballed the price to gain volume and poke its competitor in the eye. UPS said on Tuesday that the contract would add to earnings and consolidated margins, allaying some of those concerns. The Postal Service packages will also fit into UPS’ existing network and won’t require additional aircraft. The company does plan to hire about 200 pilots to handle the increased volume. Although FedEx’s contract with the Postal Service expires on Sept. 29, Tomé said she wants UPS to switch over that Postal Service volume by peak season, which now starts in earnest in early November.

That’s a lot for investors to digest. The biggest concern for the parcel industry is the extra delivery capacity lingering from the ramp-up during the pandemic. This should give shippers the upper hand and put pressure on price. Amazon is exacerbating the problem by resurrecting a strategy of leveraging its delivery network to pick up third-party packages and deliver them.

Still, UPS’ revenue per package was flat in the first quarter from a year ago even amid weak demand and customers’ trade-off of speed for lower-priced delivery options. That’s a good sign for a rebound of price in the second half of the year, about which some investors had expressed skepticism.

All signs point to UPS closing this year on a strong note. The difficult part for investors will be when to get on board.

More From Bloomberg Opinion’s Thomas Black:

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist writing about the industrial and transportation sectors. He was previously a Bloomberg News reporter covering logistics, manufacturing and private aviation.

More stories like this are available on bloomberg.com/opinion

©2024 Bloomberg L.P.

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Published: 24 Apr 2024, 12:24 AM IST
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