Failure to deliver for investors is more of the same for UPS stock

Self United Parcel Service NYSE:UPS can be used as a leading indicator of the economy and the performance of the S&P 500, it sends a mixed signal. On the one hand, operational improvements and greater efficiency allow UPS to take advantage of growth when its business recovers. On the other hand, economic conditions are difficult, forecasts could be optimistic and recovery is still far away. Returns on capital are safe, but share prices are not. While the analyst consensus continues to see a double-digit rise, it is declining due to revisions leading the market lower and the technical picture is not promising.

UPS struggles in first quarter and reaffirms guidance

UPS struggled in the first quarter with weakness across all segments, impacting its bottom line and bottom line. The company posted revenue of $21.7 billion, a decline of $5.3 billion year-over-year, which missed analyst consensus by 120 basis points. The weakness was led by the International segment, which fell 6.3% on a 5.8% decline in volume, followed by a 5.3% contraction in Supply Chain Solutions and a 5% decline in the core US domestic segment. US volume fell 3.2%; deleveraging impacted Supply Chain Solutions.

The margin is a mixed bag of results ultimately unfavorable to today’s market. The company reported better-than-expected consolidated adjusted operating margin and profit strength compared to consensus reported by Marketbeat, but earnings were weak. The company’s margin was reduced by 310 basis points year-over-year due to declines in volume, pricing and mix, which efficiencies failed to overcome. The company is building leverage for recovery, but needs recovery for traction. The first quarter’s $1.43 was $0.08 higher, but down $0.77 from last year or 35% on the 5.3% revenue contraction.

Guidance was reaffirmed despite weak first quarter revenue and persistent economic challenges. The company expects a return to growth later this year that should leave revenues in the range of $92 billion to $94.5 billion. The midpoint of the range is above consensus but likely optimistic given the FOMC outlook. The company’s guidance depends on an economic turnaround in the second half of the year that would be unlikely without an interest rate cut. The odds of an interest rate cut in 2024 have declined sharply over the past two months and will likely continue to decline as inflation data arrives.

UPS hinders the operation of postal services

UPS made headlines by taking the U.S. Postal Services business away from FedEx. The company’s CEO says the business will increase margins within the first year and over the life of the contract. The contract runs for five and a half years, starting in September 2024 and will begin impacting operations in the fourth quarter, just in time for the holidays. The deal will have a positive impact on revenue, but its impact on earnings is questionable despite management’s claims. They believe the company aligns with their network in a cost-effective way. UPS says it will hire more pilots to cover the load but will not have to buy more planes. UPS did not comment on the terms of the agreement.

UPS capital returns are safe: distribution growth is not

UPS is a solid dividend-paying stock with a high yield of nearly 4.5%. The yield is high due to the falling stock price and the payout ratio, which is also high. At 74%, the dividend is sustainable, but cash flow is tight and has caused a slowdown in the pace of distribution increases. The 5-year CAGR is in the double digits, but the latest penny increase is worth just 0.6%, and another tepid increase is expected this year. Share buybacks with compound dividends; buybacks reduced the count by an average of about 1% at the end of the first quarter.

Price action in UPS is rising after the release and shows a rising support level within a newly formed trading range. However, the new range is at the end of a downtrend and resembles a bearish triangle. This pattern could lead to a continuation of the downtrend and a new low for the stock price. Critical support is near $135; a move below could lower the market to $120 or lower. The critical resistance is the combined effect of the 30-day EMA, the 150-day EMA, and the upper limit of the trading range near $160. A move above $160 will be necessary to change the technical outlook for range-bound trading, with the possibility of a new low.

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