UPS Profit Miss Reflects Loss to FedEx or Wider Economic Weakness?

Jul.26.06 | About: United Parcel (UPS)

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

UPS's Earnings Miss Jolts Investors

  • Summary: United Parcel Service Inc.'s stock fell 14% in the aftermath of the company's Q2 earnings report. Revenue rose 15% to $11.74 billion, and net income rose 7.6%. EPS of $0.97 fell below the consensus analysts' estimate of $1.00. Package volume rose 6% to an average of 15 million per day, down from 9% growth last quarter. US ground and air deliveries rose 4.7%. UPS' supply chain unit's results were particularly weak: operating margins fell to 2.3% versus 16.5% for the company's US package delivery business. CFO Scott Davis said that the timing of weekends and holidays this year led to a loss of one and a half operating days, equivalent to $0.04 in EPS, and also blamed the rise in fuel prices for lower profitability. He also issued Q3 guidance of $0.87-0.91, below the current consensus estimate of $0.97. Net profit for the full year is now expected to rise 11-12%, at the low end of prior guidance of 11-16%.
  • Comment on related stocks/ETFs: Investors in UPS' stock (NYSE:UPS) will focus on the contrast with FedEx, which reported 27% profit growth for the quarter and has avoided in investing in unnecessary fixed assets and the supply chain management business. According to the WSJ article, Merrill Lynch cut its rating on UPS to "Sell" and said the "valuation no longer makes sense". UPS' international shipping volume was certainly weak compared to FedEx's, which faced the same challenges from higher fuel costs and the timing of weekends and holidays this year. But the more significant issue for investors is whether UPS' results point to a slowing in economic growth as much as company specific problems. The key metric is UPS' unit volume growth of only 6% versus 9% for last quarter. This data point is consistent with the view of the economy painted by the latest Fed FOMC minutes: ".. growth of economic activity in the second quarter slowed substantially from its rapid first-quarter pace." See commentary on the FOMC minues here.