UPS foresees ‘mild recession’ in 2023 and posts first revenue decline since the 2008 financial crisis

Shares of United Parcel Service Inc. rallied Tuesday, even after the package-delivery giant reported a surprise decline in fourth-quarter revenue, missing Wall Street expectations for the first time in 12 quarters, and warned of the first yearly decline in revenue in 14 years.

Investors expressed relief, however, as UPS beat fourth-quarter profit expectations, raised its quarterly dividend and authorized a new $5 billion stock-repurchase program, which represented more than 3% of the company’s market capitalization. The new quarterly dividend of $1.62 a share implies a dividend yield of 3.55% at current stock prices, which is more than double the implied yield for the S&P 500

of 1.68%.

And despite the downbeat revenue outlook for 2023, the company is targeting an adjusted operating margin of between 12.8% and 13.6%, which Cowen analyst Helane Becker said was better than expected and reflected how management was dealing with a difficult operating environment.

“UPS has managed expenses well during the global volume decline and air freight normalization, so we are confident about their ability to achieve their margin goals,” Becker wrote in a note to clients.

The stock

climbed 3.1% in morning trading to outperform the S&P 500’s 0.7% gain.

Before the opening bell, the company reported fourth-quarter revenue that fell 2.7% from a year ago to $27.03 billion, while the average analyst estimate compiled by FactSet had called for a 1.1% rise to $28.08 billion, with all three business segments missing expectations.

U.S. Domestic Package revenue rose 3.1% to $18.25 billion but was below the FactSet consensus of $18.46 billion, while International Package revenue fell 8.3% and Supply Chain Solutions revenue dropped 18.1%.

The increase in U.S. package revenue came as revenue per piece increased 7.2%, with higher prices offsetting a 3.8% drop in average daily volume. UPS said half the volume decline was from its largest customer, which the company has indicated in previous annual reports to be Inc.

UPS said volume came in as expected during October and November, including a surge in volume from Black Friday through the week after Thanksgiving. But December volumes fell short of projections as consumers cut back on spending at the height of the holiday season.

For UPS’s bottom line, net income rose to $3.45 billion, or $3.96 share, from $3.09 billion, or $3.52 a share. Excluding nonrecurring items, adjusted earnings per share of $3.62 beat the FactSet consensus of $3.59.

For 2023, UPS expects revenue of between $97 billion and $99.4 billion, down from 2022 revenue of $100.34 billion and below the FactSet consensus of $99.89 billion. That would be the first yearly decline in revenue since 2009, during the height of the financial crisis.

Chief Financial Officer Brian Newman said on the post-earnings conference call with analysts that the “base-case” assumption that led to the 2023 guidance was that there would be a “mild recession” in the U.S. in the first half of the year, followed by a “moderate recovery” in the second half.

In Europe, Newman said, the company expects a recession in the first half of the year, and for China, it expects weak demand in the first quarter with a recovery beginning in the second quarter.

UPS’s stock has climbed 8.8% over the past three months, while the Dow Jones Transportation Average

has gained 6.4% and the Dow Jones Industrial Average

has tacked on 3.3%.

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