UPS stock slips to key support; falling wedge points to a rebound

United Parcel Service (UPS) is a top American company that provides package delivery solutions around the world. Over the years, it has accumulated one of the biggest aircraft fleets in the world, which helps it to move parcels within the shortest time possible. 

UPS operates in a highly competitive industry. Its primary competitors are companies like FedEx, USPS, and Amazon. Globally, it competes with the likes of DHL and Royal Mail.

UPS has benefited substantially from the growth of e-commerce in the past decade.

This trend has helped it boost its annual revenue from over $74 billion in 2019 to over $90 billion in 2023.

However, its profitability growth is often impacted by the substantial labor and energy costs. In the US, the company boosted the average salary of a full-time driver to $170,000, a substantial amount. 

These costs have contributed to its underperformance in the past few years. Its stock has risen by just 30% in the last ten years and fell by 30% in the past 12 months. 

The UPS stock was trading at $130.37 on Friday while its HypeIndex rose by 115%.

Positive hype

• UPS stock has generated more positive hype even after publishing weak second-quarter financial results.

• Its revenue dropped from $22.1 billion in Q2’23 to $21.8 billion in the second quarter while its diluted EPS fell from $1.79 to $1.65. These results were weaker than the consensus estimate.

• The positive hype is mostly because the company has returned to volume growth in the United States for the first time in nine quarters. The management believes that this trend has more room to run, which will translate to higher revenues.

• Management also expects that its full-year results will be strong this year. It guided to $93 billion in annual revenue, up from $90 billion in the last financial year. 

• The company is also taking measures to offset its labor expenses increase. In a recent statement, the CEO said that the firm would slash 14% of its workforce in a move expected to save $1 billion annually, 

• It also plans to grow its operations through acquisitions. It recently acquired Estafeta, a Mexican company. Its goal is to boost its presence in Mexico, where many companies have shifted their operations to as tensions with China continued.

• UPS is also a good rewarder of shareholders. Despite its revenue slump, the company aims to buy back over $500 million worth of shares. It has a dividend yield of 5% and has raised dividends for 14 years. Its 5-year dividend growth rate was over 11.6%.

• UPS has also become a highly undervalued company with a forward P/E ratio of 17.

Negative hype

UPS has generated some negative hype in the past few weeks:

• Competition is rising substantially as companies like Amazon and FedEx work to gain market share. This trend could impede its pricing power and affect its margins.

• Talking of margins, its trend has not been good. The most recent results showed that its adjusted operating margin dropped by 370 basis points to 9.5%. Its net income margin of 5.87% is lower than the industry average of 6.10%.

• UPS missed Wall Street consensus in its second-quarter results. Its revenue miss was over $414 million. Looking back, the company has a track record of missing its revenue figures since it has done so in the last four consecutive quarters.

• Fuel costs are expected to remain stubbornly high as oil price rises. Brent and West Texas Intermediate (WTI) have risen as tensions in the Middle East have rallied.

Summary of the UPS stock

The weekly chart is not looking good as the stock has dropped from $212 in January 2022 to $130. However, a closer look shows that it has found some support at the 61.8% Fibonacci Retracement point. 

At the same time, it has formed a double-bottom pattern at $130. In most cases, this pattern leads to a bullish breakout. Also, it has formed another bullish pattern known as a falling wedge, which is nearing its confluence level.

Therefore, from a contrarian perspective, and based on the growing hype, there is a likelihood that the stock will bounce back in the coming weeks.

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