Please ensure Javascript is enabled for purposes of website accessibility

Why UPS Earnings Are in Trouble

By Dan Caplinger – Jul 21, 2013 at 1:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company already preannounced troubling results, but UPS earnings could still gain from longer-term trends.

United Parcel Service (UPS -0.39%) will release its quarterly report on Tuesday, and in a world in which package delivery and Internet commerce go hand in hand, you'd think that everything would be rosy for the carrier. Yet the UPS earnings preannouncement earlier this month suggested otherwise, raising some doubts about the company's immediate future and sending shares down as a result.

UPS provides a wide range of services, ranging from lightning-fast overnight air delivery to slower ground transportation. With so much of its business dependent on macroeconomic trends, the sluggish global economy has had a big impact on not only how much it's shipping but also the ways in which customers are choosing to get things where they want. Let's take an early look at what's been happening with UPS over the past quarter and what we're likely to see in its quarterly report.

Stats on UPS

Analyst EPS Estimate

$1.13

Change From Year-Ago EPS

(1.7%)

Revenue Estimate

$13.59 billion

Change From Year-Ago Revenue

1.8%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

How much will UPS earnings get hit?
Analysts have had to reduce their views on UPS earnings recently, with estimates for the June quarter having fallen by a dime per share and full-year 2013 calls getting cut by more than double that amount. The stock has actually held up quite nicely, rising more than 7% since mid-April.

Most of those analyst downgrades have come in the past week or so, in light of the company's own preannouncement of its second-quarter earnings expectations. UPS projected earnings of $1.13 per share, below the $1.20 that analysts had expected prior to the announcement. Citing a slowing domestic economy, overcapacity in the air-freight market, and customers choosing lower-cost shipping options, UPS also cut its 2013 estimates to $4.65 to $4.85 per share.

Fortunately for UPS, the trend toward cheaper shipping has less of an impact on it than on rival FedEx (FDX 0.10%), which relies much more on high-speed options. In its most recent quarter, profits in FedEx's express business dropped by two-thirds, and that pulled overall operating income down by 28%.

UPS has some other problems of its own. Although workers approved a new master union contract for its 235,000 employees that will run through 2018, freight employees rejected a proposed deal that their union said would have changed health-insurance coverage for 140,000 workers. With a July 31 deadline, negotiations apparently haven't resulted in a settlement of the labor dispute yet. UPS cited the labor negotiations as slowing package volume growth as well.

Still, the big catalyst for future growth remains online commerce. Internet sales rose 16% in the U.S. last year, yet with e-commerce representing only about 5% of total sales of consumer goods, there's still plenty of room for further gains. Key relationships with Amazon.com (AMZN -0.56%) will be important to maintain as the online leader continues to seek ways to expand its reach, but UPS also needs to ensure that it gets its share of competitors' shipping volume as they seek to dethrone Amazon's dominance of the sector.

With the UPS earnings preannouncement already having answered many questions, investors should focus on initiatives the company is making to try to keep costs under control. Things like expanding its natural-gas fleet of trucks should help it take advantage of lower fuel costs and increase efficiency, but cost-cutting can only do so much without a boost in global economic activity.

Click here to add UPS to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Amazon.com, FedEx, and UPS and owns shares of Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

United Parcel Service Stock Quote
United Parcel Service
UPS
$184.17 (-0.39%) $0.72
Amazon.com Stock Quote
Amazon.com
AMZN
$91.90 (-0.56%) $0.52
FedEx Stock Quote
FedEx
FDX
$178.00 (0.10%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.