United Parcel Service (UPS) has been experiencing a tumultuous period since reaching a new labor agreement with the Teamsters union. While higher labor costs have led to a decline in earnings estimates and target prices on Wall Street, it is important to note that labor is not solely responsible for the recent slump in UPS stock.
In an update shared with investors on Monday evening, UPS disclosed the financial implications of the new contract. Under the five-year agreement, Teamster costs will increase an average of 3.3% per year. This figure is slightly lower than the headline numbers suggesting wage increases of 5% to 6%. It is important to keep in mind that wages do not represent the entirety of a worker’s total compensation, as pensions and healthcare benefits need to be considered. Additionally, there are other factors that offset the impact of higher wages.
According to Chief Financial Officer Brian Newman, “UPS retains flexibility to implement technology to further driver productivity,” which is certainly positive news. Despite this reassurance, UPS stock has declined by 2.4% during midday trading, compared to a 0.4% drop in the S&P 500 and a 0.1% decrease in the Dow Jones Industrial Average. Over the course of eight consecutive days, UPS shares have fallen by approximately 9%, based on Dow Jones Market Data.
Since the labor deal was agreed upon in late July, UPS shares have experienced a significant decrease of about 15%. In contrast, the S&P 500 has only slipped by approximately 2%.
UPS Faces Concerns from Investors
Investors are expressing their dissatisfaction with UPS, and it’s not primarily due to labor costs. According to Citi analyst Christian Wetherbee, the company’s third-quarter earnings per share guidance fell 25% below the consensus estimates. While Wall Street was projecting earnings of around $2 per share, Wetherbee expects earnings of approximately $1.60 per share for the third quarter. The reduction in earnings can be attributed to labor costs and some volume shifts.
Despite this setback, Wetherbee maintains his fourth-quarter earnings-per-share estimate of $2.75. He does, however, lower his price target for UPS stock from $200 to $180 while keeping his Buy rating. The analyst emphasizes that although this update is undoubtedly negative, the stock’s weakness has already priced in the risk associated with the original guidance. Wetherbee hopes to see evidence of volumes returning to UPS’s network before making any further judgments.
Other analysts are also adopting a more cautious stance. BofA Securities analyst Ken Hoexter has reduced his target price for UPS stock from $190 to $177. Similarly, Evercore analyst Jonathan Chappell has lowered his price target from $185 to $179. Both analysts currently rate UPS stock as Hold.
On the other hand, Bernstein analyst David Veron remains less concerned and maintains his Buy rating for UPS stock, with a price target of $221. He believes that the third quarter should mark the final guidance cut following the new agreement.
If Veron’s prediction holds true, it could present an opportunity for investors.
Interestingly, the Street appears to be favoring rival company FedEx (FDX) at the moment. Around 59% of analysts covering FedEx stock have Buy ratings, compared to 49% for UPS stock. The average Buy-rating ratio for stocks in the S&P 500 stands at approximately 55%.
The Price Targets for FedEx and UPS
FedEx and UPS, two major players in the delivery industry, have seen their average price targets increase in recent times. According to analysts, FedEx’s average price target stands at $272, marking a 7% rise from its current levels. Similarly, UPS’s average price target is estimated to be around $189, which is about 20% higher than its current market price.
It is interesting to note the positive projections for both companies in the market. As businesses continue to rely on these delivery giants for their shipping needs, investors are hopeful about the future. With the increasing demand for efficient logistics solutions, FedEx and UPS are well-positioned to leverage their strong market presence and expand their operations.