By Jonathan Chen
UPS Inc. (NYSE:UPS) reported earnings this morning that beat Wall Street estimates, but the conference call has been pretty bleak so far, saying the U.S. economy is slowing down in the third quarter and the debt crisis in Washington is weighing on mindsets.
The Atlanta-based company reported earnings of $1.05 per share on $13.19 billion in revenues. Wall Street analysts had been expecting earnings of $1.04 per share on $13.14 billion in revenues.
"UPS's results reflect the continued execution of our strategy and the ability to grow earnings in an uneven economic environment,” said Scott Davis, UPS chairman and CEO. “Customers are recognizing the value of the integrated solutions that leverage UPS capabilities around the globe and across the entire supply chain.”
The company grew revenues 8.1% year-over-year, but the company was able to manage expenses and raise prices and grew earnings 25% year-over-year.
The company said sales in the U.S. rose 6.4%, and international revenues jumped 13.3%, led by the growth in Asia. The company said that Europe was stronger than expected as well. The company shipped 957 million packages during the period, or about 15 million per day.
The company reaffirmed adjusted earnings this year of $4.15 to $4.40 per share, while Wall Street is expecting earnings of $4.34 per share.
While at first blush, the quarter looks decent, the guidance for the third quarter is pretty weak, especially given the fact that Asia is slowing more than UPS expected. Excluding China, Asia is slower than they expected, and that is where the majority of the growth is coming from. On the other hand, Europe is a little better than the company is expected. As such, shares are falling around 3% as of the time of this writing.
As we have seen oil prices climb back towards $100 per barrel, the company mentioned that when it gets to $110 per barrel, UPS starts to consider altering supply chains.
Shares are a little pricey at these levels, trading at nearly 20 times 2011 earnings and 14.8 times 2012 earnings. The Atlanta-based company sports a 2.8% dividend yield.
UPS has an incredibly strong economic moat around its business, and as such, is not likely to lose market share to competitors anytime soon. It will be interesting to see what FedEx (NYSE:FDX) has to say when it reports in September. When the Memphis-based company reported in June, the economy was not that bad, and shares were rewarded about 3% the day it reported earnings.
It looks as if the economy is slowing to the point where people are going to ship less packages than most expect, which is not good for UPS, and stocks going forward.
Brown is in the red today, and may not deliver black to your portfolio anytime soon.
Traders who believe that UPS and the economy will turn around might want to consider the following trades:
- Use the recent dip in UPS and FDX to add to or initiate positions in these names.
- Consider buying Amazon.com (NASDAQ:AMZN), which generates a ton of business for UPS, especially if you believe that the economy is growing stronger than most expect.
Traders who believe that the economy is going to continue to stay weak may consider alternate positions:
- Short the above mentioned names, as valuations are high, and growth is slow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.