The Road Ahead For UPS: Can Stock Deliver After Contract Deal?

Key Points

• UPS and Teamsters Union reach a new contract agreement, averting a potential strike, but investors appear uncertain about the stock's future.
• The company's stock is currently in a correction that began in April. 
• Full-year revenue projections at the lower end of previous forecasts are contributing to investor skepticism.
• UPS, like other delivery companies, faces excess capacity as pandemic-era online shopping declines.
• UPS earnings are expected to decline by 18% this year, with a predicted 10% increase next year.

What’s next for United Parcel Service Inc. NYSE: UPS stock after management and the Teamsters union came to an agreement on a new contract, averting a strike?  

Judging by the stock’s price action since the parties struck a deal, investors seem unsure of what to expect now. 

The stock is still in the correction it began in April, after its most recent earnings report when the company said full-year revenue would be at the low end of its previous forecasts. 

Like other delivery companies, including truckers and other transporters, UPS is dealing with excess capacity as the pandemic-era online shopping sprees subsided. 

Slowing Retail Sales Means Less Shipping Volume

At the time of the report, UPS CEO Carol Tomé said that a deceleration in domestic retail sales resulted in lower shipping volumes than the company anticipated. In addition, demand remained weak in Asia, as China’s economic recovery has taken shape at a more leisurely pace than many had hoped and expected. 

"Given current macro conditions, we expect volumes to remain under pressure," she said. 

Following the UPS revenue warning, shares of arch-rival FedEx Corp NYSE: FDX fell, as did truckers J.B. Hunt Transport Services Inc NASDAQ: JBHT, XPO Inc NYSE: XPO and Old Dominion Freight Line Inc NASDAQ: ODFL, on concerns of lower shipping volumes. 

Of those stocks, UPS is the only one that hasn’t recovered and gone on to rally significantly. 

Revenue Fell Short Of Estimates

In the first quarter, UPS revenue of $22.93 billion came in shy of analysts' estimates, as you can see using MarketBeat’s United Parcel Service earnings data. Net income came in ahead of views, but the revenue miss, combined with the warning, sent shares tumbling 10% lower. 

Since then, shares have muddled along in a cup-shaped correction, trading below their 50-day and 200-day moving averages. So far, it’s corrected 16% from peak to trough. It began etching the right side of the cup the week ended June 16, long before it became clear a crippling strike would be avoided.

Shares are up 6.74% in the past month, and UPS has even managed to rack up a year-to-date gain of 7.93.

Investors Didn't Seem Concerned About A Strike

A UPS strike, especially if prolonged, would have been disastrous not only for the company but for the broader economy. However, if you look at UPS’ recent price acceleration, as well as the strong uptrend in the S&P 500 in recent months, it didn’t seem that investors truly believed the risk of a strike was high. 

The S&P industrials sector, tracked by the Industrial Select Sector SPDR Fund NYSEARCA: XLI, is up 3.88% in the past month. UPS is the second-largest stock in the sector by market capitalization. 

The sector, which is also home to trucking companies and FedEx, has been a solid middle-of-the-pack performer in the past month, as all S&P sectors posted gains. In other words, there’s plenty of evidence to show no one was especially worried by the prospect of a UPS Strike.  

So that brings us back to the question of what’s next for UPS. 

Analysts Expect EPS Decline

The company’s earnings are expected to decline this year, in keeping with the company’s April revenue warning. Analysts predict the company will deliver full-year earnings of $10.67 a share, which would be a decline of 18%. Next year that’s seen rising by 10% to $11.71 a share. 

In the same vein as trying to prove a negative, the market isn’t rewarding UPS for not being subject to a strike. There’s been no relief rally as the deal was announced. 

As of the close on July 27, UPS shares were down 0.42% for the week and were slightly lower in after-hours trading. 

Next Report On August 8

The company next reports earnings on August 8, ahead of the market’s open. Wall Street expects net income of $2.51 per share on revenue of $23.22 billion, which would be year-over-year decreases.  

Is it possible that better-than-expected results, or more upbeat comments about full-year revenue and earnings could give the stock a boost? Of course. 

For now, UPS is a solid dividend payer, with a yield of 3.5%, and it will continue to be a staple of many institutional portfolios.

MarketBeat’s United Parcel Service analyst ratings show a “hold” on the stock with a price target of $191.08, an upside of 2.44%. That’s not a stretch to imagine more gains ahead, given the stock’s recent upside trajectory.