UPS, (NYSE: UPS), one of the largest small-package delivery firms in the world, starting to deliver on its plan for recovery, thanks to cost cuts and strengthened demand overseas.
Now the question is whether, the company, which has a 21% U.S. market share, can sustain its momentum.
UPS’ third quarter earnings exceed analysts’ estimates. Revenue fell 3.7% from a year earlier, but most of that decline stemmed from the company’s smallest division, supply-chain services. International package revenue gained 5.9%. Net income slid 14.8%, but adjusted profit climbed 7.4%.
The numbers aren’t as bad as they look. UPS’ decision to cut deliveries for Amazon (NASDAQ: AMZN) to the tune of 50% by next June is starting to weigh on revenue. But UPS took that route because its deliveries for Amazon aren’t very profitable, as they are light in weight and travel short distances.
Revenue also suffered from UPS’ September sale of its Coyote Logistics unit for $1 billion. However, that represents part of UPS’ strategy to focus more on its packages business. The company said the freight broker Coyote is too dependent on the volatile trucking business.
Tariff policy hurts, cost cuts help
The zig-zagging U.S. tariff policy also hampered UPS’ earnings, as companies subject to higher or uncertain tariffs held back on buying inputs. Some consumers are cutting back on shopping as well. U.S.-China trade in particular has shrunk.
But on the cost side, UPS enjoyed a 3.2% reduction in operating expenses during the third quarter from a year ago. UPS has dumped 48,000 workers so far this year. It has about 490,000 in total, according to its web site. It also has closed daily operations at 93 leased and owned buildings.
The company says it has saved $2.2 billion through its restructuring this year.
UPS also has garnered a preliminary agreement with the US Postal Service for the latter to provide last-mile parcel delivery for UPS’ low-cost Ground Saver shipping service. That would repair an accord that collapsed in 2024 over rate hikes and saves UPS money.
Thanks to the cost cuts, UPS posted an adjusted operating profit margin of 10% in the third quarter, up from 8.8% in the second quarter. And it expects an increase to 11%-11.5% in the fourth quarter.
‘Encouraging guidance’
UPS forecast revenue of $24 billion in the fourth quarter, above analysts’ projection of $23.82 billion. “Fourth-quarter guidance was encouraging,” wrote Morningstar analyst Matthew Young.
The better-than-expected earnings report gave UPS’ stock a shot in the arm. It has risen 4.7% since the report was released Oct. 28. But it has slumped over the past 12 months, three years, five years and 10 years. The decline is 30% for the past year.
UPS pays a hefty forward dividend yield of 7%. But the distribution about equals what UPS will earn in 2025 and is less than expected profit for 2026. That’s a lot more than the 40% of profit that most S&P 500 dividend payers dole out. So the dividend may be at risk of reduction.
On the positive side, UPS shares trade at only 12.6 times 12-month forward earnings estimates, compared to 22.9 for the S&P 500 and 15.6 for UPS’ five-year average.
So the company is in the midst of delivering an attractive financial package, but it has yet to get all the way to the door.
The author owns shares of UPS.
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