1 Unfavorable trend that explains 27% decline in UPS stock

It was hard to do United Parcel Service (UPS 1.35%) and its shareholders lately. The stock is down 27% since the start of 2023. Much of the reason is the effect of declining delivery volumes in the core US package market. Here’s what happened and why investors should be monitoring matters closely when considering a position in the stock today.

The volume decreases

The volume declines are particularly problematic because they came after exceptional growth driven by periods of isolation. This growth encouraged package delivery companies to expand their supply, creating a significant overcapacity in 2023 as supply expanded and the slowing economy caused demand to fall.

As the chart below demonstrates, the steep decline in volumes in 2023 ultimately led to a decline in average revenue per piece. Year-over-year revenue has declined for every quarter since the first quarter of 2023.

Data source: UPS presentations. Chart by author.

The bulls and bears debate on UPS

That said, the chart also shows a slight pick-up in year-over-year volume growth in the second quarter, and management expects that to grow throughout the year.

For UPS bulls, this is a turning point in the company’s outlook, as volume growth will lead to a decrease in excess capacity in the industry, creating a better pricing environment.

On the other hand, UPS points out that UPS only increased its delivery volumes in Q2 because it took deliveries at a lower margin (notice the drop in the chart for average revenue per piece). It’s something UPS’s “better, not bigger” framework implies it wouldn’t do.

Moreover, the company lowered its full-year profit and margin expectations on its Q2 earnings call. It’s not a good look. Management only presented its three-year plans in March and at the time reiterated full-year guidance that it will then cut in July.

Image source: Getty Images.

Where next for UPS?

The cut in full-year earnings expectations so soon after the investor day is a clear sign of near-term pressure on US earnings. However, delivery volumes are improving, which can’t be a bad thing. As such, the stock is attractive to investors who can tolerate the potential for short-term bad news.