UPS drops most in seven months as margin outlook falls short

United Parcel Service Inc. tumbled the most in seven months after the courier’s profit-margin outlook disappointed investors who had hoped that a persistent e-commerce boom would reap greater benefits.

U.S. domestic adjusted operating margin will be 10.5% to 12% in 2023, the company said Wednesday as it outlined a three-year financial plan. Investors had been expecting about 13%, according to surveys by JPMorgan Chase & Co. and Credit Suisse Group AG before the presentation.

UPS didn’t provide an earnings forecast for this year or offer a cost-cutting outline, which also may have weighed on the stock.

The shares dropped 4.5% to $200.31 at 1:46 p.m. in New York after tumbling as much as 6.1%, the most intraday since Oct. 28. UPS had gained 25% this year through Tuesday while the S&P 500 rose 13%.

“It’s really the domestic margins,” Bloomberg Intelligence analyst Lee Klaskow said in an interview. “People were hoping there would be more upside.”

Chief Executive Officer Carol Tome, who assumed her role a year ago, has adopted a “better not bigger” strategy to drive margins higher. The Atlanta-based company is using new technologies to win over small customers that tend to pay full price for delivery while larger clients often command discounts. It’s also pursuing highly profitable health-care deliveries.

Tome defended the 2023 target, saying that it shows significant improvement over last year’s 7.7%.

“If there’s a bias in the forecast, the bias is toward the high end of the range,” she said. “This is a message of momentum. We’re going to deliver the numbers that we’ve laid out.”

Package growth will be robust, Tome said. E-commerce, which soared as the Covid-19 pandemic closed physical stores and is expected to remain strong, will drive the U.S. small-package market to grow 12% annually over the next three years to $195 billion, she said. Worldwide parcel volume is expected to rise about 10% a year through 2023.

Meanwhile, U.S. parcel capacity will be short of demand by 7 million packages, driving strong pricing, Tome said.

UPS is also looking at ways to increase the number of package drop-offs on each route and to begin same-day deliveries, Tome said.

The company forecast that the overall profit margin would increase to between 12.7% and 13.7% in 2023, helped by international margins at 21.5%. The company’s overall margin was 10.3% last year.

UPS plans between $13.5 billion and $14.5 billion in capital spending over the next several years to keep up with the global package growth fueled by the pandemic. The company also said it would use $6.9 billion of its cash to repay maturing debt through 2023.

Efforts to boost efficiency and rope in more profitable customers will help increase return on invested capital to between 26% and 29% by 2023, up from 22% last year, the company said.