Where Will UPS Be in 3 Years?

UPS (UPS 1.42%) management laid out its 2026 targets on its investor day presentation earlier in the year, and they will serve as a guidepost for investors. The question is not whether UPS will be a good value if it hits them but whether it will achieve its aims. Here's what you need to know about UPS over the next three years. 

UPS is in recovery mode

Following a challenging 2023 in which delivery volumes were less than expected, UPS suffered a protracted labor contract negotiation. The dispute caused customers to divert volume to other networks in fear of strike action. The result was a new contract that hit UPS costs hard. 

These pressures carried on through into the first-quarter 2024 earnings for UPS. 

The table below shows how the increase in compensation and benefits meant operating expenses only declined by 1.4% – bad news when declining volumes pulled down revenue by 5.3%. As such, adjusted operating profit fell by a whopping 31.5% in the first quarter. 

Still, as previously discussed, the 31.5% decline is better than the 40% decline forecast by former CFO Brian Newman in late March, 

Data source: UPS presentations

The investment case for UPS stock

The bulls' case for UPS emphasizes that the company will pass an inflection point in 2024 with the company lapping the compensation cost increase, volumes returning to year-over-year growth, and UPS winning back lost volumes. Indeed, management expects its second half of 2024 adjusted operating profit to increase by 20%-30% over the second half of 2023. 

The increase in delivery volumes should help to reduce overcapacity in the industry and help UPS grow its revenue per piece over the next few years. On the cost per piece side of the equation, management believes its investment in automation and smart facilities will enable UPS to keep costs in check by consolidating facilities. In addition, these technological investments mean UPS can expand capacity via productivity initiatives rather than purely through investment in new facilities.

Along with a general recovery in delivery volumes, UPS continues to focus on growing revenue in the higher-margin targeted end markets of small and medium-sized businesses (SMB) and healthcare logistics. Management plans to increase its penetration of the U.S. SMB market from 29% in 2023 to 40% over time. In healthcare, management plans to double its revenue from $10 billion in 2023 to $20 billion in 2026. 

Management expects these growth, productivity, and cost initiatives to result in the following in 2026. 

Data source: UPS presentations 

Can UPS hit its targets?

UPS' healthcare and SMB plans are ambitious but also in line with an excellent trend the company has established. For example, the increase in U.S. SMB penetration from 27% in 2021 to 29% in 2023 resulted in a 12% increase in revenue per piece, and its fast-growing healthcare revenue comes with higher margins.

In addition, the technology investments make sense and will help lower costs—UPS will cut 12,000 jobs this year to reduce costs by $1 billion. Furthermore, the plan's reliance on revenue per piece increases over volume increases aligns with management's focus on growing its most profitable revenue rather than chasing volume growth per se. 

Image source: Getty Images.

That said, the one area of concern is an oversupply in the U.S. small package delivery market (following the capacity expansion during the boom years of lockdowns). UPS is relying on demand to catch up. That could take some time, particularly if economic growth disappoints. However, since the risk is front-end loaded to the three-year plan (meaning the most significant risk is upfront due to the current overcapacity in the industry), the stock will be highly attractive if UPS can deliver a quarter or two in line with expectations.