Market Value Plummets by 110 Billion, Revenue and Profit Both Decline! Can New Business Ventures and Acquisitions Help UPS Achieve Growth Against the Odds?

In an effort to reverse the downturn, UPS is exploring new growth opportunities. So, can these measures help UPS achieve growth against the odds in a less than optimistic freight market environment?

Source: Internet

1. The Second Quarter Becomes a Crucial Turning Point

Recently, the stock price of the global courier giant, United Parcel Service (UPS), plummeted nearly 14%, marking the largest single-day drop since October 2008. As of the close on July 23, the decline was still as high as 12%. This drop has reduced UPS's total market value to $109.24 billion (approximately 790 billion RMB), with a single-day market value evaporation of $15 billion (approximately 110 billion RMB).

Although the significant drop in UPS's stock price is related to the recent broad sell-off in U.S. stocks triggered by risk-aversion and a major sell-off in U.S. tech stocks, it is more closely related to its disappointing second-quarter earnings report.

According to UPS's financial report, the second-quarter consolidated revenue was $21.8 billion, down 1.1% from the same period in 2023. Consolidated operating profit was $1.9 billion, and adjusted operating profit was $2.064 billion, down 29.3% year-on-year. Adjusted diluted earnings per share were $1.79, down 29.5% from the same period last year. Revenue, profit, and earnings per share all fell short of market expectations.

UPS Executive Vice President and CFO Brian Dykes stated that the second quarter "represented an important turning point for our business. In the U.S., volume showed positive growth, which was the last full quarter with the high wage growth rate related to the first year of our new truck driver contract." Additionally, through the Fit to Serve initiative, UPS reduced over 11,500 positions, equivalent to approximately $350 million in savings in the first half of 2024. We expect to achieve approximately $1 billion in savings by the end of the year.

From a product perspective, UPS reported that customers are trading down between different services. Specifically, we saw customers shifting from air freight to ground transportation and from ground transportation to SurePost. As a result, average daily air freight volume fell by 7.8%, while average daily ground transportation volume increased by 2.3%.

The second quarter was also a turning point for UPS's international business. For the first time in 10 quarters, 11 of UPS's top 20 export countries saw year-on-year growth in average daily volume, including several key markets in Europe. On a regional level, average daily volume in Asia grew this quarter. In the Americas, we continue to see significant signs of nearshoring.

UPS CEO Carol Tomé emphasized that 2024 will witness the most condensed peak season since 2019. There are only 17 days between Thanksgiving and Christmas. According to our peak season volume forecast, on peak day, December 18, volume in the UPS network will reach a historic high. When such traffic flows into the network, it is necessary to charge to provide good service because the service process requires hiring personnel, leasing aircraft, and delivering vehicles, etc. Therefore, from a demand environment perspective, prices will remain unchanged.

2. New Business Ventures and Acquisitions

In UPS's 2024 revenue guidance of $93 billion (down from $94.5 billion), the U.S. Postal Service's air freight business is included. After winning this business from FedEx, UPS is now fully prepared to work with the U.S. Postal Service (USPS).

UPS U.S. Executive Vice President and President Nando Cesarone said during the analyst conference call following the announcement of the second-quarter results for 2024: "Regarding USPS, the two teams are actually planning and executing face-to-face. Nearly 50% of the changes have been completed so far, and we will continue to push this process forward. We will fully implement the UPS network serving USPS on September 8, and the contract will officially start on October 1, when all USPS volume will be handed over to UPS."

UPS CEO Carol Tomé also stated that the new USPS air freight business is being developed in the Supply Chain Solutions division and is planned to be fully implemented before the peak season. The work integration is progressing smoothly, and we expect this business to bring profit growth to the company.

In addition to being fully prepared for the new USPS business, UPS recently announced a new acquisition. On July 23, UPS announced that it had reached an agreement to acquire Mexico's leading courier company Estafeta, stating that this action will make it "the world's leading international parcel and logistics service provider."

Without providing financial details, Tomé said: "This is a huge win for UPS and our customers. By combining Estafeta with our end-to-end services already available in Mexico and connecting it to the global coverage of the UPS integrated network, it will greatly enhance logistical coordination to help customers move manufacturing and distribution closer to the U.S. Our plan is to complete this acquisition by the end of the year."

UPS Executive Vice President and President of International, Healthcare, and Supply Chain Solutions Kathleen M. Gutmann said: "The combined business of UPS and Estafeta will exceed $1 billion. Therefore, by acquiring Estafeta, UPS will continue to consolidate its leadership in the North American region. Considering these 300,000 packages, all these shippers need a quality cross-border solution capable of accessing the best small parcel network in the U.S. We are providing this solution."

Therefore, these are additional packages. If you look back at Marken, Bomi, and MNX, you can see they all met their business cases and synergies, both in terms of revenue and costs, because they opened up high-end customer end-to-end opportunities. And UPS leads in the transfer of supply chains to Mexico, with cross-border business also growing in double digits, which will also help in this regard.

3. Significant Improvement Expected in the Second Half of the Year

In fact, over the past two years, many international logistics giants have struggled due to factors such as the continued spread of global inflation, a sluggish freight market demand leading to a decrease in global parcel volume, and rising costs. Even UPS has not been immune. Since reaching its market value peak in early 2022, UPS’s shining moments seem to have stalled.

In the first half of 2024, UPS completed 35 operational closures, including closing five buildings, and plans to complete another five operational closures in the second half of this year.

This year, UPS announced it would lay off 12,000 employees, accounting for 2.4% of its global workforce, which will save $1 billion. So far, UPS has cut 26% of its workforce and, as it continues to deploy, it expects to meet its reduction target by 2026. Additionally, UPS announced an agreement to sell Coyote to RXO for $1.025 billion. Until the transaction is completed, the company will continue to maintain its revenue and earnings expectations.

Given the current situation, UPS has readjusted its 2024 revenue guidance to $93 billion, down from its previous estimate of $94.5 billion. Tomé stated: "But in terms of operating profit, as we move into the second half of the year, in the U.S., we expect the business volume mix characteristics to be similar to the first half, which will compress revenue growth per item."

However, the full-year guidance for 2024 includes the newly won USPS air freight business, which will be fully launched by the end of the third quarter. Potential customers in commercial accounts are also very strong, so we expect a significant improvement in the second half of this year. Additionally, the highlight in B2B is returns. This point improved by 3%, and the inclusion of Happy Returns brought growth. With this increase in potential customers and the resulting pull, this will continue to accelerate UPS's B2B business.

It can be seen that in order to reverse the downturn, UPS is making every effort to seek new growth points. Whether it is undertaking USPS air freight business, acquiring new courier companies, increasing investment in smart logistics, enhancing return services, or expanding heavy goods delivery services to broaden the potential market, UPS will take more new initiatives in the future to drive performance growth. As for whether this giant can achieve growth against the odds in a less than optimistic freight market environment, we will wait and see.