After reporting a significant jump in profit after tax in 2021, United Parcel Service (NYSE:UPS) has lost $22.53, or 10.6% of its value year-to-date (YTD). In the last two weeks, UPS stock has been on a bearish run.
Like every other shipping company, UPS profited from the pandemic-induced disruption in the global logistic system, as seen in the company’s financial statement for 2021. Revenue rose by just 15% from $84.6 billion in 2020 to $97.3 in 2021, but UPS grew profit by nearly 860% to $12.9 billion from $1.3 billion in 2020.
The huge increase in profit was a result of the high freight rate caused by severe shipping disruptions in 2020. According to a report, ocean freight rates jumped by 700% in the first half of 2021 due to high demand following the reopening of businesses.
In the U.S., high demand for products and truck driver shortages also aided UPS and other shipping companies’ profit for the year. However, now UPS stock is declining.
First of all, businesses are already stocked up on inventory. Walmart (NYSE:WMT) and Target (NYSE:TGT) have a combined inventory value of about $72.4 billion as of the third quarter. Firms are now focused on trying to sell the excess amid a 40-year high inflation rate and projected rate increases. Therefore, the rush for shipment is moderated by more freight-carrying capacity.
Looking at UPS’s 2021 financial statement, it was easy to notice the company’s trip operations remained largely the same in 2019 and 2021 based on fuel expenses. It spent $3.8 billion on fuel in 2021 and $3.3 billion in 2019, meaning the profit realized was from an increase in its freight rate, not growing business operations.
Now that the rate has started normalizing, UPS’s revenue and profit will respond positively, like they did when it was rising. However, UPS stock could remain down in near-term.
Slowing global business activities have a direct impact on freight operations. With the Federal Reserve expected to raise rates even more and consumer prices up 7.9%, freight operations will suffer a decline in 2022. The ongoing Russian invasion of Ukraine and China’s recent Covid-19 restrictions will also contribute.
Also, I expect to see a slowdown in U.S. exports in 2022. A potentially stronger U.S. dollar could drag on overseas demand for U.S. goods and, subsequently, related shipping companies.
The fundamentals of UPS stock are strong, but when you adjust it for Covid-19-induced growth, you will see why it declined immediately when the freight rate started falling. Therefore, given the projected recession and the aforementioned issues, UPS stock could remain down in the near term.
On the date of publication, Samed Olukoya did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
