FedEx's (NYSE: FDX) recent earnings report wasn't good, and the stock was sold off sharply in response. But what does it mean for its perennial rival, UPS (NYSE: UPS)? Here's a look at what happened with FedEx and what investors can expect when UPS releases its third-quarter 2024 earnings in about a month.
FedEx did not deliver good news
There's no point in sugarcoating matters. FedEx's first-quarter 2025 earnings report was weaker than expected, and management promptly cut its full-year 2025 revenue and earnings guidance:
Full-year revenue is expected to grow at a low-single-digit rate compared to prior guidance for a low-single-digit to mid-single-digit rate.
Full-year earnings per share, before accounting adjustments, is expected to be $17.90 to $18.90 compared to prior guidance for $18.25 to $20.25.
The headline numbers help frame the picture, but the details are everything and are particularly interesting for UPS.
FedEx's weaker-than-expected quarter
FedEx CEO Raj Subramaniam discussed the matter on the earnings call, saying the demand environment was weaker than expected in the quarter, "particularly in the U.S. domestic package market." He singled out FedEx's higher-margin business-to-business (B2B) deliveries as an area of weakness and said, "We saw increasing demand for our lower-yielding services."
It gets worse. Total average daily volume in the U.S. domestic market declined by 0.4% year over year.
The one bright spot was U.S. domestic revenue per package (yield), which improved from $13.82 in the first quarter of 2024 to $13.87 in the first quarter of 2025. Still, this represents a significant sequential reduction from the $14.20 reported in the previous quarter.
What it means to UPS investors
The update is concerning for UPS investors for a few reasons. First, the weakness that FedEx cited in B2B deliveries in the U.S. indicates that there's unlikely to be any significant improvement in business conditions for UPS. That's not good news because UPS' last earnings report already saw the company reporting a 4.6% year-over-year decline in U.S. B2B average daily volume.
Second, along with the margin pressure from a potential ongoing decline in B2B volume, UPS could also suffer from the shift to lower-yield deliveries that FedEx cited. In fact, UPS is already suffering from this impact, as its higher-yield U.S. next-day air volumes are declining much more than its lower-yield ground revenue in 2024.
U.S. Domestic Package | Revenue Per Piece (Second Quarter) | First Quarter Year-Over-Year Volume Growth (Decline) | Second Quarter Year-Over-Year Volume Growth |
|---|---|---|---|
Next Day Air | $23.14 | (8.5%) | (7.1%) |
Deferred | $17.45 | (8.1%) | (8.8%) |
Ground | $10.92 | (2.3%) | 2.3% |
Total U.S. Domestic Package | $12.35 | (3.2%) | 0.7 % |
Data source: UPS presentations.
Given that FedEx is also discussing the shift in volume toward lower-yield deliveries, it's reasonable to expect UPS to face ongoing pressure on the issue. Indeed, FedEx management said its yield was lower than expected in the quarter. Moreover, FedEx's Subramaniam said, "We're not assuming a significant comeback on the industrial environment in the rest of this calendar year."
Third, as you can see in the table above, UPS reported volume growth of 0.7% in its second quarter (ended June 30), but FedEx's U.S. domestic volume declined by 0.4% in its quarter ended Aug. 31. This is a worrying sign for UPS because an ongoing improvement in U.S. delivery volumes is a key part of its internal plans, and the industry needs volume growth to try to reduce industry capacity surplus.
Is UPS stock a buy?
The crucial question for UPS investors is this: Having already significantly cut its full-year guidance on weaker-than-expected margin performance (linked to a shift toward lower-yield deliveries that FedEx recently cited), is the bad news already priced into UPS stock? It would be nice to think so, and given the marketplace's pessimism, the stock arguably has a significant upside, provided it maintains its full-year guidance.
That's usually a favorable situation. Unfortunately, UPS' track record of guidance has not been good recently, and FedEx's recent update doesn't say conditions are improving. As such, there's still reason for caution over UPS' near-term prospects, so monitoring the stock closely might make more sense before buying it.
Thinking longer term, lower interest rates will inevitably spur economic growth, which usually means growth in package delivery volumes. FedEx and UPS are likely to recover from this, and long-term investors willing to tolerate the potential for bad news over the near term might be tempted to buy UPS and ride out any volatility.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
Own UPS Stock? Here's What FedEx's Big News Means to You. was originally published by The Motley Fool