UPS Terminates Estafeta Deal: How Should You Approach the Stock Now?

Group 1: Acquisition and Strategic Impact - United Parcel Service (UPS) has announced the withdrawal from the acquisition of Mexican firm Estafeta due to the inability to meet closing conditions, which was initially aimed at enhancing trade opportunities in Mexico and beyond [1][2] - The deal was part of UPS' "Better and Bolder" strategy to become a leading international small package and logistics provider, with expectations to close by the end of 2024 [2] Group 2: Financial Performance and Challenges - UPS is experiencing revenue weakness attributed to geopolitical uncertainty, higher inflation, and a decline in package volumes, leading to a 3.8% year-over-year decrease in average daily volumes in the first half of 2025 [4][5] - The company reported a 2.7% year-over-year revenue decline in the June quarter of 2025 and has refrained from providing revenue or operating profit guidance for 2025 [5][10] Group 3: Cost-Cutting Measures - In response to high labor costs and declining volumes, UPS is implementing cost-cutting measures, including offering buyouts to delivery drivers for the first time in its history and aiming to reduce its workforce by 20,000, approximately 4% of its global workforce [6][7] - UPS has also agreed to reduce business with its largest customer, Amazon, by more than 50% by June 2026, as Amazon was not considered a profitable customer [8] Group 4: Stock Performance and Valuation - UPS shares have declined over 30% year-to-date, underperforming compared to the Zacks Transportation—Air Freight and Cargo industry's 26.1% decline [9][10] - The current Zacks Consensus Estimate for UPS' 2025 adjusted earnings is $6.50 per share, reflecting a 15.8% year-over-year decline, with revenue estimates suggesting a 3.9% decline from 2024 [12] Group 5: Dividend Concerns - Despite an attractive valuation with a forward price-to-sales ratio of 0.81X, concerns arise regarding UPS' ability to sustain its dividend due to an elevated payout ratio of 87% and insufficient free cash flow to cover dividend payments in the first half of 2025 [13][17] - The company generated $742 million in free cash flow while paying out $2.7 billion in dividends during the same period [17]