The Shipping Giant Flashes a Recessionary Warning - InvestingChannel

The Shipping Giant Flashes a Recessionary Warning

Proprietary Data Insights

Financial Pros’ Top Integrated Logistics Stock Searches in the Last Month

#1‘United Parcel Service70
#3‘J B Hunt Transport15
#4‘Expeditors Intl4
#5‘C.H. Robinson2
#ad [FREE REPORT] What Investors Are Searching

Fin Pros Are Clear: UPS Warns of a Recession

Equities shattered like glass, sliding lower after United Postal Service (UPS) reported miserable earnings last week.

Sharply lower revenues and volumes sent shares spiraling after the latest earnings report.

Financial pros spent a lot of time looking at the company’s financials and the earnings call transcript, according to our TrackStar data.

UPS is still an incredibly profitable company.

But is it time to snap up shares?

UPS’ Business

In a world driven by connectivity, United Parcel Service (UPS) stands as a stalwart of global shipping and logistics solutions, binding continents with its promise of speed, reliability, sustainability, and innovation. 

UPS delivers an extensive array of services catering to diverse clientele needs, from time-definite and deferred to a more bespoke range of logistics, distribution, and financial services. 

The company segments its business into the following areas:

  • U.S. Domestic (65% of total revenues) – Encompasses time-definite and deferred delivery within the United States, making it a domestic powerhouse in logistics.
  • International (20% of total revenues) – Extends similar delivery services across over 220 countries, emphasizing UPS’s global footprint.
  • Supply Chain Solutions (15% of total revenues) – This segment tailors logistics and distribution solutions alongside offering freight forwarding and financial services, showcasing the versatility of UPS’s service palette.

The third quarter of 2023 didn’t paint a rosy picture for UPS, with reported revenues of $21.1 billion marking a 12.8% drop from the previous year, combined with  EPS of $1.31, down 56% YoY. 

Daily volumes

Source: UPS Q3 2023 Earnings Presentation

Domestic shipping suffered a volume dip due to labor disruptions, a scenario that diverted a chunk of shipping volume to other players. This episode, albeit temporary, shaved off a significant revenue slice, underscoring the delicate dance between operational intricacies and financial performance.

Despite these headwinds, the quarter highlighted UPS’s resilient stride towards operational efficiency, with a notable uplift in healthcare and e-commerce service demands.



Source: Stock Analysis

2023 marks the first year in a decade revenues fell. Yet, gross margins held remarkably steady around 23.5%.

However, profit margins jumped substantially in the last few years as compensation and benefits dropped as a percentage of revenue dropped by 5%. Given the recent concessions to the unions, we don’t expect those to remain low.

That means the company will need to find a way to improve free-cash-flow margins, which have fallen over the last two years.

Management’s done a good job of keeping debt flat, leaving them plenty of room to invest where they need.



Source: Seeking Alpha

We were a bit surprised to find the two major package shippers, UPS and FedEx (FDX), trading at the lowest P/E multiples of the group.

However, UPS trades at a higher price-to-cash flow than its peers. Even the company’s price-to-sales ratio is at the higher end.



Source: Seeking Alpha

Every shipper saw revenues drop this year. However, JB Hunt (JBHT) and FedEx forecast modest growth for 2023 to early 2024.

They’re also the only ones expecting to see earnings growth during that same period.

Clearly, the shippers all forecasting low to negative growth indicate a recession on the horizon.



Source: Seeking Alpha

UPS’s gross margins are good but not as high as FedEx’s.

When it gets down to EBIT margins, it’s the highest of the group.

But with free cash flow, Expediters International (EXPD) comes out leaps and bounds ahead, as does CH Robinson Worldwide (CHRW). However, both are brokerage-based models without owned assets. So this isn’t entirely surprising.

Our Opinion 6/10

We feel the headwinds facing UPS warrant additional caution. 

Although shares are down, we expect earnings to shrink as labor costs rise.

Given the better growth prospects, we prefer FedEx over UPS if you want a logistics investment.

Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here

Related posts

Advisors in Focus- January 6, 2021

Gavin Maguire

Advisors in Focus- February 15, 2021

Gavin Maguire

Advisors in Focus- February 22, 2021

Gavin Maguire

Advisors in Focus- February 28, 2021

Gavin Maguire

Advisors in Focus- March 18, 2021

Gavin Maguire

Advisors in Focus- March 21, 2021

Gavin Maguire