UPS Is Adjusting to the New Labor Deal Math. So Is Its Stock

But in the third quarter of 2022, UPS reported EPS of $2.99. It’s a big year-over-year drop. What’s more, guidance implies a fourth-quarter operating profit of about $2.4 billion or $2.5 billion. Wall Street was looking for closer to $3 billion, according to FactSet.

Guidance seemed to send the stock lower, but guidance wasn’t really a function of an economic surprise or more competition.

“Although UPS cut the 2023 outlook, we don’t believe the setup on the stock changed too much,” wrote J.P. Morgan analyst Brian Ossenbeck in a Friday report.

 Why is he so blasé? All the cuts and investor angst seem to boil down to labor math. Most of the wage increases in the new five-year labor deal with the Teamsters union happen immediately or in year one. That helps workers make up for all of the recent inflation. Pricing for UPS, however, doesn’t go up immediately. UPS has to raise prices slowly over time.

“We need $1 of pricing over five years, that’s like 20 cents a year, to cover the cost of the contract,” CFO Brian Newman tells Barron’s. But 46% of the wage increases are coming in the first 12 months.”

It will take a while for margins to catch back up. It’s a wrinkle from recent high inflation. In the past, when wages were rising 2% a year and inflation was running at 2% there was no mismatch.

That upfront cost dynamic is something investors are going to have to be ready for with auto maker labor deals with the UAW too.

Through early trading Friday, UPS stock is down about 17% over the past 12 months. The
S&P 500
and
Dow Jones Industrial Average
were up about 9% and 2%, respectively.

So what will get UPS moving higher again? J.P. Morgan’s Ossenbeck is looking for volume growth before getting more positive on shares. Until then, he has a Hold rating on UPS, with a $165 price target for shares.

Write to Al Root at [email protected]