- United Parcel Service's turnaround efforts are taking hold, setting this market up to bottom and reverse course for 2025.
- Margin improvement is among the highlights of Q3, driving solid cash flow and earnings improvement, sustaining the outlook for capital returns.
- Analysts and institutional activity in Q3 signals a bottom is in play, but lows near $125 may be retested before a sustained rally forms.
The price action in United Parcel Service (NYSE:UPS) may have reached the bottom, but the downtrend isn’t over yet. The Q3 results affirm the outlook that growth can be sustained and earnings leverage realized, sparking a surge in the price action. Still, the subsequent selloff from a multi-year high confirms resistance at a critical level and the likelihood of lower prices for the stock this year.
Ultimately, it is good news for investors because it means a retest of the recent lows is likely; when it happens, the market may confirm the bottom and give the all-clear that it’s time to buy this transportation stock. As it is, the market bounced from the critical support only once and will likely retest it again at least once because it is far from confirming a technical reversal.
The question is, what kind of bottom does the stock form, how many opportunities to buy at the multi-year low, and how long will it be until there are no more chances? Based on the Q3 results, it might not be long. The takeaway from the report is that turnaround efforts are taking hold, growth is back in the picture, and earnings are improving, sustaining the capital return outlook, which is robust. The company yields more than 6% with shares near $135, and the distribution can be expected to grow over time.
United Parcel Service Shows Improvement in Q3
United Parcel Service’s Q3 results show a marked improvement over the prior quarter and year. The company posted $22.2 billion in revenue, growing by 5.4% YOY and outpacing the consensus estimate on strength in all segments. Domestic strength is noteworthy, up 5.8% on a 6.5% increase in volume that shows a stronger-than-expected customer base. International grew by 3.4% on a 2.5% increase in revenue per item, and Supply Chain Services contributed with an 8% increase, showing solid demand throughout the system and globally.
The margin news is equally good, resulting in solid earnings growth and sustained balance sheet improvement. The margin widened because of efficiency efforts, investments in technology, and repositioning, which are expected to sustain margin strength in 2025.
The net result is that the consolidated operating margin widened by nearly 300 basis points to 8.9%, driving a 22.8% increase in the adjusted operating earnings. This leaves the adjusted EPS $0.14 or 860 basis points better than expected. The balance sheet shows the impact of divestiture and transformation costs but remains in fortress condition. Leverage is low at 1.2X equity and 3.4X cash, leaving the company in nimble operating condition and able to sustain business transformation and capital returns.
The guidance for Q4 is mixed but favors a price action bottom. The company reduced its outlook for revenue to reflect the divestiture of Coyote Logistics and a diminished outlook for the 4th quarter, falling short of the consensus by nearly 100 basis points. The outlook implies growth will persist but slow to under 2%. However, the company also improved the margin outlook by 20 basis points to 9.6%, reflecting the Q3 strength and the expected stickiness of margin improvements.
Analysts Put a Floor on UPS Price Action
The consensus price target for UPS fell in 2024, but the downtrend ended in the summer. MarketBeat tracks numerous coverage initiations and positive revisions since August that have stabilized the downtrend in the consensus figure, which implies a nearly 10% upside from critical support targets. The Q3 results are sufficient to sustain the trend and support the market.
Institutional interest also shifted over the summer. The institutions sold on balance in the year's first half but reverted to buying in Q3. The Q3 spike in institutional buying coincides with the August-to-October rally and indicates a bottom in the market, if not “the bottom” for the market. Technical support appears strong in the $130 to $135 range, but a move to the $125 level is possible.
The best-case scenario is that UPS market support holds firm at the 30-day moving average, near $137.50 and above strong support targets. 