Is UPS the most suitable transportation unit for you?

UPS (NYSE: UPS)4.41 TP3T's dividend yield and the recent three-year outlook given at the Investor and Analyst Day make the stock look attractive, but is it enough to invest in a company that has faced challenges over the past year? There are also some question marks over the company's guidance.

UPS's Guidance Raises Questions

There are three interrelated factors to consider:

• UPS did not meet its initial 2023 guidance.

• Given management's recent comments on the first quarter, UPS has a lot of work to do to meet its full-year 2024 guidance.

• The three-year financial targets look ambitious, and at least one Wall Street analyst thinks the market doesn't believe in them.

A cynical view would conclude that investors are believing in optimistic medium-term targets for a company that missed guidance last year and is under pressure to meet 2024 guidance. However, I think this view is too critical. Here's why.

What happens in 2023?

UPS did not meet its guidance last year, as can be seen by comparing columns three and four in the table below. Note, however, that UPS did not meet the guidance in 2022 one year ahead of scheduleThe 2023 target (set out in the 2021 Investor Day presentation) was achieved, as can be seen by comparing the first and second columns.

The change in UPS's performance over the past two years illustrates the difficulty of forecasting delivery volume. It is not only a matter of forecasting economic growth (which leads to growth in express delivery volume), but also a return to spending on services rather than products due to de-industrialization.

As if that weren't enough, the company's high-profile carrier negotiations have also led to a significant drop in courier volumes in 2023, as customers switch couriers to other networks for fear of strike action.

Data from UPS Presentation.

While missing guidance is never good news for a company, it's safe to say that UPS is in a tough spot for 2023.

What about 2024?

At the end of the Q&A session, Simmons CFO Brian Newman provided a surprise for the negative side, as UPS maintained the full-year guidance it gave on its Q4 2023 earnings call in late January, which was for first-half adjusted operating profit to fall 20% to 30% year-over-year, and for the second half of the year to grow 20% to 30% year-over-year. Newman forecast a 40% decline in the first quarter, leaving investors to wonder how UPS will meet its full-year guidance.

This number is significantly below the Wall Street consensus for the first quarter, which required UPS to reach consensus in the second quarter in order to meet the lower end of its first-half guidance.

Data Source UPS Presentation

In addition, if UPS struggles to meet its targets, this could mean that the company will not be able to win back the customers it lost as a result of the labor dispute in 2023. Winning back these customers will be critical to the positive volume growth that management expects to see in the second half of the year. Newman said in January that the return to volume growth was "primarily driven by the diversion of sales in the U.S. that we experienced during last year's labor negotiations.

What it means for investors

As mentioned earlier, the first quarter guidance is worrisome. However, it is also important to note that these calculations are relative to Wall Street's expectations, and that Koon management will have a much better idea than analysts of the progress of Winners in losing customers. Koon management is not responsible for Wall Street's estimates, and in the circumstances described above, the 2023 earnings "miss" is understandable.

In addition, no one buys stock for a quarter of earnings, and the drop in the stock price after the announcement suggests that some pessimism has crept into the stock. In general, it makes sense to look at what Koon's guidance was in the first quarter earnings report (likely in late April) before concluding that UPS won't be able to meet its initial guidance for the full year of 2024, and UPS remains attractive, but prudent investors may want to wait and see what Koon has to say before buying.

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Lee Samaha does not own any of the above stocks.The Motley Fool recommends United Parcel Service.The Motley Fool has a disclosure policy.

Is UPS the best transportation stock for you? This post was originally published by The Motley Fool.