Please ensure Javascript is enabled for purposes of website accessibility

Why United Parcel Service Stock Crashed Today

By Lee Samaha – Jan 23, 2015 at 1:47PM

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

Why did shares of United Parcel Service go into a slump?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of United Parcel Service (UPS -2.29%) dropped more than 10% in early trading today, after the company announced that it expects its fourth-quarter earnings to come in significantly below estimates. Fourth-quarter adjusted diluted EPS is now expected to be $1.25 compared to analyst forecasts of $1.47. 

For the second year in a row, UPS failed to execute well during the holiday season. As with last year, the problem was with sufficiently predicting and managing e-commerce demand. However, last year, UPS had insufficient capacity to meet peak demand. This year, it had too much.

According to CEO David Abney in today's press release: "UPS invested heavily to ensure we would provide excellent service during peak when deliveries more than double. Though customers enjoyed high-quality service, it came at a cost to UPS. Going forward, we will reduce operating costs and implement new pricing strategies during peak season."

So what: Essentially, the company invested heavily in building out extra capacity to meet peak demand, only to find that demand was less than expected on certain days. The result was a decline in productivity that hurt its profitability in the quarter.

The issue demonstrates the increasing complexity of predicting demand spikes due to the expansion of e-commerce. For example, last year, consumers and retailers were left disappointed as UPS' operations were hit by severe winter weather and unexpected surges in peak demand from e-commerce. This year, UPS overinvested and shareholders are now paying the price.

Unfortunately, the bad news doesn't stop there. Management also estimated that currency headwinds and increased pension expenses would lead to 2015 diluted EPS coming in at "slightly less" than its target of 9%-13%.

Now what: UPS management is going to have to do a good job convincing investors that it has a handle on how to deal with peak demand in the holiday season. Moreover, investors will ask if the latest disappointment is evidence that UPS is facing increasingly severe challenges in managing e-commerce demand spikes. Particularly, as it's building out network capacity just to deal with a few days' peak demand. UPS' management has a lot of explaining to do in the next few weeks.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Apple and United Parcel Service. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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, Inc. Stock Quote
United Parcel Service, Inc.
$161.54 (-2.29%) $-3.78

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

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.