UPS sinks most since March as cost creep squeezes profit margins

United Parcel Service Inc. tumbled the most since the early days of the pandemic, as investors looked past surging sales to focus on rising costs.

Profit margins will be pressured this quarter as the company accelerates investment to speed deliveries and absorbs increased expenses to handle peak-season volume, UPS said as it reported third-quarter results. Benefits, incentive pay and other items will create additional drag of $300 million or more.

Investors will have to wait until next year for margin to improve at the U.S. unit, Chief Executive Officer Carol Tome said in a conference call Wednesday.

UPS’s sales have soared as consumers turn to online shopping rather than risk going to stores during the pandemic. But, the package courier’s costs have climbed from efforts to protect workers and because of the jump in residential deliveries. The Atlanta-based company earns more from commercial customers because more packages are left at each stop.

“UPS continues to have trouble bending the cost curve,” Cowen analyst Helane Becker said in a note to clients.

The shares dropped 4.8% to $162.60 at 11:13 a.m. in New York after slumping 7.4%, the largest intraday decline since March 16. UPS had advanced 46% this year through Tuesday, while the S&P 500 Industrials Index fell 4.9%.Adjusted operating profit margin at the U.S. unit fell to 8.6% in the third quarter from almost 11% a year earlier.

Profit and sales topped Wall Street’s expectations, mostly driven by the International and Freight units. Adjusted earnings rose to $2.28 a share, while analysts predicted $1.90, according to the average of estimates compiled by Bloomberg. Revenue jumped 16% to $21.2 billion, exceeding estimates by almost $1 billion.

UPS plans to “significantly lower” capital spending as the company focuses on a theme of “better, not bigger,” said Tome, who became CEO in June. In a capacity-constrained parcel market for this peak season, UPS is willing to walk away from customers that are too price sensitive, she said.

“We’re OK with that if we’re losing non-lucrative sales,” Tome said.