The upcoming release of United Parcel Service's (UPS) earnings report is highly anticipated, as it will shed light on the current state of the economy and how companies are navigating the challenges posed by escalating costs resulting from new labor agreements.

In the third quarter, Wall Street analysts expect UPS to report earnings per share of $1.52 from sales amounting to $21.4 billion. In comparison, during the same period last year (2022), UPS reported earnings per share of $2.99 from sales totaling $24.2 billion.

This staggering year-over-year decline can largely be attributed to the impact of a recent labor deal that UPS struck with the Teamsters union and subsequently ratified in August.

One noticeable consequence is the migration of a portion of UPS's shipment volume out of its network. Given the uncertainty surrounding a potential strike, businesses sought to safeguard their interests. Furthermore, UPS management revealed in mid-September that some cost increases resulting from the new contract are heavily concentrated at the beginning.

While Wall Street analysts project a significant rebound in the fourth quarter, with earnings per share estimated at $3, Citi analyst Christian Wetherbee believes this outlook may be overly optimistic.

"We have maintained our fourth-quarter earnings per share estimate of $2.75, as we find the implied progression of maintained 2023 guidance overly optimistic. It is essential for us to witness concrete evidence of volumes returning to UPS's network," Wetherbee explained in a report following UPS's labor contract update.

UPS Faces Challenges in Labor Issues

Wetherbee rates UPS shares at Buy, though his price target has been revised to $180 from $200 per share. The company's management will hold a conference call at 8:30 a.m. Eastern time to discuss the latest results, with investors eagerly awaiting an update on the outlook for the rest of the year.

Investor sentiment surrounding UPS has been dampened by ongoing labor issues. In the past 12 months, UPS shares have experienced a decline of approximately 13%, whereas the S&P 500 and Dow Jones Industrial Average have seen gains of around 9% and 4% respectively. In contrast, FedEx (FDX) shares have soared by about 52% during the same period.

One contributing factor to this divergence in the UPS and FedEx stock performance lies in timing. Over the past five years, FedEx shares have risen by approximately 12%, while UPS shares have surged by about 40%.

In recent years, UPS has achieved higher profit margins and benefited from slower wage inflation. Furthermore, their workers had a labor contract with preplanned wage increases established prior to the pandemic. Presently, FedEx seems to have gained an advantage in this regard.

However, it is expected that over time, the difference in labor costs between the two companies will not be significant. This is how things are supposed to align between them.

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