United Parcel Service (UPS 1.13%) has announced that it expects its fourth-quarter and full-year 2013 earnings to come in lower than anticipated. As a result of this disappointing outlook, shares of the world's largest package-delivery and logistics company fell 0.58%. On a day when the S&P 500 edged down 0.39%, this suggests that investors are remaining cautious about UPS's future. Although this decline isn't necessarily an overreaction, is it possible that Mr. Market didn't fully comprehend the significance of the great news that UPS reported?
UPS' fourth-quarter results fell short, but there's light at the end of the tunnel!
For the quarter, UPS stated that earnings per share will likely come in at $1.25. While this surpassed the -$1.83 per share that UPS reported for the same quarter last year, the company's performance will fall short of the $1.43 per share that analysts expected. According to management, a combination of a "compressed peak season" and a higher level of online ordering than anticipated negatively affected the company's performance.
This lackluster quarterly performance is expected to weigh down UPS' full-year earnings. Management previously anticipated EPS in the range of $4.65 to $4.85, and now full-year earnings should come in at $4.61. This, too, is a letdown in comparison with the $4.75 that Mr. Market expected.
Based on these metrics alone, investors would be wise to question the prospects of UPS. However, management provided some information that makes UPS' poor earnings results look attractive.
In the release, management cited that because of the high level of online sales it had to significantly ramp up its workforce. In preparation for the holiday season, UPS initially planned on hiring 55,000 temporary workers. As it became evident that demand for the company's services was going to be greater than anticipated, UPS put additional equipment into use and recruited an extra 30,000 temporary employees.
Despite these measures, both UPS and FedEx (FDX 2.39%) came up short on meeting demand from their customers. Both companies made news when they announced that packages would be delivered late for Christmas. Even in light of these shortcomings, UPS managed to deliver a record-breaking year with 31 million packages delivered on Dec. 23 alone. This represents a 13% increase over the number of packages delivered during the prior year's peak day.
Despite temporary setbacks, both companies have performed well
The past few years have been relatively kind to UPS. From 2009 through 2012, the company saw its revenue rise 19.5% from $45.3 billion to $54.1 billion. Over that same time-frame, the company did not perform as well on net income. From 2009 through 2011, the company's bottom line rose 76.8% from $2.15 billion to $3.83 billion. However, net income fell 78.9% to $807 million in 2012. This mainly came because of an increase in its selling, general and administrative expenses, which rose from 53.7% of sales to 62.8%, as management was forced to book a $4.8 billion mark-to-market adjustment related to its pension plan.
FedEx, on the other hand, performed slightly better. Over the company's past four fiscal years, FedEx saw its revenue rise 27.5% from $34.7 billion to $44.3 billion. Similarly, its net income rose 71.6% from $1.18 billion to $2.03 billion before falling 23.2% from that level to $1.56 billion. According to the company, its bottom line was hit by higher business realignment costs and an impairment charge in its FedEx Express segment.
In spite of these recent difficulties, both UPS and FedEx have generally experienced positive long-term trends. Both are growing revenue at attractive rates and, absent the one-time expenses each saw in their most recent fiscal year, they are improving their bottom lines. If the future looks similar to the past, both are healthy businesses that have bright prospects. In its release, UPS stated that earnings per share should rise between 10% and 15% from 2013's levels in 2014. If accurate, this projection implies earnings per share for UPS in the range of $5.07-$5.30.
Foolish takeaway
Based on the evidence provided, what we have with UPS is a company whose bottom line was affected not because it had too little business, but because it had too much business. The decisions to hire additional temporary workers en-masse and employ additional equipment hurt UPS' margins. While this phenomenon typically welcomes new entrants to the market, the company is entrenched in an industry with high barriers to entry (primarily in the form of the costly equipment that a potential competitor would need).
For this very reason, the situation for UPS appears to be favorable. Because of the shift from shopping at brick and mortar businesses to online ordering, both UPS and FedEx have become inundated with demand. This means that both companies should be well situated for the future as they can control changes in demand by either raising their prices or investing in more infrastructure to capitalize on the growing industry of online sales. For a long-term investor, this could be a dream come true.
