Earnings Outlook: UPS has a lower bar to hurdle to impress investors. Can it deliver?

Wall Street’s expectations have been lowered since United Parcel Service Inc.

last reported earnings, the question is whether the bar is now low enough for investors to get back to being impressed with results.

Analyst Bruce Chan at Stifel Nicolaus believes the answer is yes, as he upgraded UPS last week to buy from hold and raised his stock price target to $224 from $210. He said improved valuation presented investors with a “good opportunity” to invest in a company with “a lot to like” about the fundamentals, particularly in the core small package unit.

Cowen’s Helane Becker, not so much, as she recommended recently investors stay sidelined, saying she believed “the peak is upon us.” Although she expects UPS to report seeing “strength in consumer-led demand,” she expects margins to be constrained by rising wages, as multiple large transport players look to accelerating hiring into the peak season in a tight labor market.

Becker reiterated her market perform rating and stock price target of $203.

Also read: Wage inflation is the ‘new norm,’ trucker J.P. Hunt says, but stock soars to biggest weekly gain in 12 years.

UPS is scheduled to release third-quarter results on Tuesday, Oct. 26, before the opening bell.

The FactSet consensus for earnings per share is $2.55, which is up 1.3% from the same period a year ago. The FactSet revenue consensus is for 6.5% growth to $22.57 billion, with revenue for its largest segment, U.S. Domestic, projected to increase 7.3% to $14.19 billion.

Those consensus estimates have declined since the start of the third quarter, from EPS of $2.64, revenue of $22.68 billion and U.S. Domestic revenue of $14.76 billion. The lowered bar for results have come after UPS reported in late July second-quarter results that disappointed investors, and chief rival FedEx Corp.

reported disappointing quarterly results last month.

Read more: UPS stock dives as earnings beat, but U.S. domestic revenue, outlook come up short.

And while the stock has bounced more than 11.8% since it closed at a more-than five-month low of $178.42 on Oct. 4 through Thursday’s close, it has still lost 5.0% since UPS last reported earnings before the July 27 open.

In comparison, the Dow Jones Transportation Average

has gained 5.7% and the Dow Jones Industrial Average

has tacked on 1.1% since UPS last reported.

The company will be looking for an investor reaction similar to the one following its first-quarter report, when blowout results sparked a 10.4% surge in the stock on April 27, to kick off a streak of nine straight record closes.

Besides earnings and revenue, the following are some things investors may be looking out for in UPS’s earnings release, and in the post-earnings conference call with analysts:

Impact of inflationary pressures, which was one of the key risks to UPS’s outlook mentioned by CFO Brian Newman on the 2Q call. So far, inflation hasn’t been too much of a problem, as 2Q revenue growth of 14.5% outpaced the 10.5% rise in operating expenses, which included a 4.5% increase in compensation and benefits.

Comments regarding consumer behavior, another key risk Newman noted. On the 2Q call, Chief Executive Carol Tomé said inflation becomes a problem when the consumer says “ouch,” and stops buying. But so far, “the consumer continues to buy,” Tomé said.

Free cash flow, as $6.8 billion was generated during the first half of the year, which was more than what was previously generated in any full year.

Any update to the full-year revenue outlook. Newman said in July that overall second-half revenue growth was expected to be around 5.4%, which would imply 2021 revenue of $94.95 billion, according to a MarketWatch analysis. If 3Q revenue matches the FactSet consensus of 6.5% growth, it would imply 4.6% growth in 4Q revenue would be needed to achieve its 2H goal.

Capital expenditures, as the company’s current guidance is for “about” $4.0 billion in 2021.

More detail on the performance of the healthcare business, which CEO Tomé said is one of the company’s “wildly important” Customer First initiatives, and includes the transport of COVID-19 vaccines. In 2Q, healthcare revenue grew 19.8% globally.

The FactSet consensus for 3Q International segment revenue is $4.66 billion, up 14.1% from a year ago.

The FactSet consensus for Supply Chain and Freight segment revenue is $3.67 billion, a 6.5% decline from a year ago. The year-over-year comparison incorporates the completion in April of the sale of UPS Freight for $800 million to TFI International Inc.

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