It’s a big day for
United Parcel Service
and its workers. Results of members’ voting on the company’s new five-year labor deal with the Teamsters union are in.
More than 86% of members voted yes. It’s good news for many companies, not only UPS (ticker: UPS).
“Our members just ratified the most lucrative agreement the Teamsters have ever negotiated at UPS. This contract will improve the lives of hundreds of thousands of workers,” said Teamsters General President Sean O’Brien in a news release. “Teamsters have set a new standard and raised the bar for pay, benefits, and working conditions in the package delivery industry.”
UPS and the Teamsters agreed to a new labor deal in July, but that was only a first step. Union leadership essentially recommends that members ratify a deal when they negotiate a new agreement, but it is the union membership that ultimately decides. Investors couldn’t assume ratification was inevitable. This season of labor talks has been different.
There was a small chance of a no vote. Workers at
(SPR) voted a contract down in June. The offer was modified and union membership ratified the new contract a few days later.
Rejection of the UPS deal was a possibility because inflation has made it tougher for all workers to figure out if they are getting ahead. Consumer price inflation averaged roughly 2.1% a year in the two years leading up to the 2018 labor negotiation. It has averaged about 6.6% a year in the two years leading up to this one.
UPS stock closed down 1% in Tuesday trading while the
Dow Jones Industrial Average
dropped 0.3% and 0.5%, respectively. UPS stock is up 0.2% in after-hours trading, shortly after the Teamsters update.
Ratification removes a small overhang, reducing the chance for labor-related stock volatility. That’s a positive for shares. The larger issue investors will wrestle with now is higher costs. The deal Teamsters voted on included wage increases that will average roughly 5% to 6% a year.
“We had been factoring in closer to 4% for [contract] year one and 3% going forward,” wrote Evercore ISI analyst Jonathan Chappell in a report following the deal. “Thus there is the potential for cost per package inflation to exceed our estimates by several hundred basis points through our forecast horizon. There could be productivity offsets to these figures.”
Higher costs have impacted shares. UPS stock is down about 11% since the deal was announced last month. The
is off about 3% over the same span.
(FDX) stock is flat.
Still, it is difficult to work out costs from headlines. “It has been reported that drivers at UPS will earn $170,000/ year, but that is misleading,” said TD Cowen analyst Helane Becker. “Base pay is about $85,000 or so, and then benefits make up the rest.”
Both analysts still rate UPS stock at Hold. Becker’s target for the price is $190 a share. Chappell’s is $185, while the stock was at $167.67 early Tuesday afternoon.
Overall, 47% of analysts covering the company rate the shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target is about $192 a share.
Cost concerns might be one reason why UPS has a relatively low Buy-rating ratio. A slowing economy and more competition from
(AMZN) are playing a role as well. Amazon has restarted a third-party logistics service that will compete, to some extent, with FedEx and UPS.
A year ago, 50% of analysts covering UPS stock rated shares at Buy and the average analyst price target was about $211 a share.
The Teamsters’ vote mattered for more than just UPS investors.
(STLA) are negotiating with the United Auto Workers. What the Teamsters did could affect negotiators on both sides. It shows that, to some extent, union members are willing to ratify deals with wage increases in the range of 5% to 6%.
The auto negotiations will unfold over the coming weeks; the contract expires in mid-September.
Write to Al Root at firstname.lastname@example.org