UPS Stock Falls Despite Earnings That Matched Forecasts. What Sent the Stock Lower.

UPS (ticker: UPS) on Thursday reported third-quarter earnings per share of $1.57 from sales of $21.1 billion. Wall Street was looking for earnings per share of $1.52 from sales of $21.4 billion. A year ago, UPS reported earnings of $2.99 a share from sales of $24.2 billion.

It’s a big year-over-year drop. Much of the decline was due to the impact of a new labor deal with the Teamsters Union that was ratified in August.

For starters, UPS said, some shipment volume left its network. That makes sense because businesses worried about a potential strike wanted to protect themselves. What is more, UPS management said in mid-September that some cost increases from the new contract were front-end loaded.

“While unfavorable macro-economic conditions negatively impacted global demand in the quarter, our U.S. labor contract was fully ratified in early September and volume that diverted during our labor negotiations is starting to return to our network,” said CEO Carol Tomé in a news release. “Looking ahead, we are well-prepared for the peak holiday season.

The fourth quarter is typically good for UPS. The volume of shipments typically picks up by about 35%, CFO Brian Newman told Barron’s. That’s why the company is hiring 100,000 temporary employees to handle the bump.

Still, this year doesn’t look quite as strong. For the full year, UPS said it expects sales of about $91.8 billion and an operating profit margin of about 11.1%. That’s down from prior guidance of $93 billion and 11.8%, respectively.

That implies fourth-quarter sales and operating profit of about $$25.7 billion and $2.3 billion, respectively. Wall Street is looking for closer to $26.3 billion and $3.4 billion.

One thing that investors, and Wall Street, might have missed was how the new labor agreement affect results. Most of the increases in wages are coming immediately, to help workers offset recent inflation, Newman said. It will take time for UPS to cut costs and raise prices to offset the initial effect.

In late trading Thursday, UPS shares were down 4.7%, while the
S&P 500
and
Dow Jones Industrial Average
had fallen 0.9% and 0.6%, respectively.

Labor and volume issues have weighed on investor sentiment for a while. Through Wednesday trading, UPS shares were down about 13% over the past 12 months. while the S&P 500 and Dow were up about 9% and 4%, respectively.
FedEx
(FDX) shares have risen about 52% over the same span.

Part of the difference in UPS and FedEx stock comes down to timing. FedEx shares are up about 12% over the past five years. UPS shares are up about 40%.

UPS has produced higher profit margins and has benefited from slower wage inflation in recent years. Its workers had a labor contract with preplanned increases from a deal signed before the pandemic. Now FedEx has the upper hand.

But over time, there shouldn’t be a huge labor cost difference between the two companies. That is how things are supposed to work anyway.

Write to Al Root at [email protected]