UPS Faces Challenges, but Lower Interest Rates Could Bring Relief

Market Pressures and Company Strategy

UPS (NYSE: UPS) is navigating through a challenging landscape. The delivery market for small packages is overflowing, which is impacting pricing at a time when economic weakness is pushing customers towards cheaper delivery services. As a result, UPS is expected to finish 2024 with earnings significantly lower than initially forecasted. However, a drop in interest rates could provide a much-needed boost for the company.

CEO Carol Tomé has emphasized a “better not bigger” approach during her leadership, which prioritizes targeted deliveries over volume growth. This philosophy shapes UPS’s competitive stance and reveals the need for lower interest rates crucial for the company’s recovery.

The Link Between Rates and Delivery Volume

Delivery volumes are influenced by economic cycles. In prosperous times, demand for package deliveries rises, while economic downturns usually lead to declines. Unfortunately, the recent economic slump coincided with a surge in capacity as companies expanded during the pandemic. UPS reported that the U.S. small package market faced about 12 million excess deliveries daily in 2024, according to management presentations.

Image source: Getty Images.

Working through this overcapacity will take time, but reducing capacity may allow UPS to stabilize. Lower interest rates can stimulate economic activity and consumer spending, resulting in higher delivery volumes as businesses transition back to more expensive, faster delivery methods.

Impact on UPS’s Business Model

This year, UPS’s “better not bigger” strategy has faced obstacles. While management focused on growth in select areas like healthcare and small to medium-sized businesses, they’ve also taken on more lower-revenue deliveries in 2024. This can be seen in the accompanying chart that illustrates a decline in revenue-per-delivery alongside a growth in overall volume.

Data source: UPS presentations. Chart by author.

With decreased interest rates, demand for package deliveries could increase, allowing UPS to align better with its long-term vision. Though current market conditions compel UPS to accept lower-revenue deliveries, this pragmatic approach is beneficial given the circumstances.

Looking Ahead to 2025

If interest rates fall in 2025, UPS could return to its foundational strategy of growth in targeted sectors, with an eye toward improving revenue per delivery.

Recently, UPS saw promising signs, including a year-over-year reduction in cost per delivery by 4.1%. The company is actively cutting costs, including a reduction of 12,000 jobs to save $1 billion, while also managing previous labor cost increases from a new contract signed in 2023. Ongoing investments in automation and smarter facilities aim to boost network productivity, allowing for better facility consolidation and cost control.

Image source: Getty Images.

Is UPS a Worthwhile Investment?

UPS stands to benefit greatly from a decrease in interest rates, which could enhance its pricing power and revenue per delivery while keeping costs under control. This combination might lead to revenue growth and higher profit margins as the company moves past recent struggles.

While there are no guarantees regarding full-year earnings expectations, UPS shares could represent a good investment opportunity, currently trading at 15.6 times estimated earnings for 2025.

Should You Invest $1,000 in UPS Now?

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Lee Samaha does not hold positions in any stocks mentioned. The Motley Fool recommends United Parcel Service and has a disclosure policy.

The views expressed here are those of the author and do not necessarily reflect the views of Nasdaq, Inc.