UPS Profit Margins Under Pressure

United Parcel Service Inc. (UPS) reports Q1 2022 results in Tuesday’s pre-market session, with analysts looking for a profit of $2.88 per-share on $23.8 billion in revenue. If met, earnings-per-share (EPS) will mark a modest improvement compared to the $2.77 booked in the same quarter last year. Rival FedEx Corp. (FDX) fell 4.0% in March after missing fiscal Q3 earnings estimates and reaffirming guidance, generating a cautious tone ahead of the news.

Freight and Fuel Pressuring Margins

The stock fell ten sessions in a row at the start of April, signaling a major shareholder exodus, ahead of this week’s closely-watched confessional. A Bank of America downgrade after the seventh day added insult to injury, dumping price to the lowest low since October. Slumping freight prices explain most of the downside, with additional capacity putting pressure on profit margins, further aggravated by fuel costs hitting their highest highs in more than a decade.

BofA Securities analyst Ken Hoexter downgraded UPS to ‘Hold’ from ‘Buy’ on Apr. 15, lowering the firm’s price target to $204. JPMorgan analyst Brian Ossenbeck followed suit, cutting the price target to $229 while citing “the fragile balance of capacity additions in an overheated freight market.”  It’s instructive to note that freight rates across the board have dropped since those downgrades but it’s too early to declare a change in trend.

Wall Street and Technical Outlook

Wall Street consensus has deteriorated in the last three months, dropping to an ‘Overweight’ rating based upon 14 ‘Buy’, 3 ‘Overweight’, 11 ‘Hold’, 1 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $150 to a Street-high $275 while the stock is set to open Monday’s session more than $55 below the median $245 target. This low placement suggests firms are doing a bad job informing clients about systemic risks in the transportation sector.

United Parcel Service broke out above the 2018 peak at 135.53 in August 2020, entering a powerful uptrend that stalled near 220 in May 2021. November and February breakout attempts failed, yielding a selling wave that dropped the stock within six points of October range support at 181. It’s been grinding sideways at that level for the last two weeks while accumulation has dropped to a six-month low. Bull and bear odds are equally weighted after the news but a long-term sell cycle could yield lower prices through most of the quarter.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.