UPS recently reported another weak quarter, with reduced guidance that may lead analysts to lower their estimates. While capital returns are safe, the stock may not rebound soon, and when it does, the rebound may not be strong.
Despite turning a corner in Q2, the odds are high that the rebound won’t start soon or be vigorous. Volume growth, though present for the first time in over two years, was weak and offset by other factors, indicating an L-shaped recovery may be the best to expect.
An L-shaped recovery includes a sharp downturn followed by a slow, gradual recovery that could take several quarters or even years to complete. While UPS’s business is sound and on track to return to growth, growth will likely be tepid in the foreseeable future.
The potential catalyst that could alter this outlook is the Federal Reserve and interest rates. The first rate cut may come soon, but it will take time for the impact to be felt by consumers who drive UPS’s business.
Key Takeaways from UPS Stock Performance:
UPS didn’t have a terrible quarter, but its results were weaker than expected, compounded by reduced guidance. The company’s net revenue of $21.8 billion was down 1.4%, falling short of analyst expectations.
While there was volume growth in the U.S., it was offset by price, mix, and weakness in other segments. The margin declined significantly due to increased labor costs from last year’s negotiations, leading to a drop in operating profit and adjusted EPS.
Guidance reduction has been a trend for at least six quarters, with the company now expecting lower consolidated revenue and margins. This news caused the stock to drop more than 10%, signaling potential further downside.
Despite plans to resume share buybacks, they are unlikely to support the market, as institutions have been net-selling and analysts are trimming targets. The sentiment and price target for UPS are falling, indicating potential for continued downward movement.
Following the Q2 release, UPS shares fell below critical support, setting a new multi-year low. The market may consolidate at this level before potentially moving lower, with $135 now acting as resistance and a possible signal for further decline.
Investors should be cautious with UPS stock as the company faces challenges in its recovery and market support remains weak. The impact of reduced guidance and labor costs could continue to weigh on future growth prospects.