Shipping giant UPS (click ticker for report: ) announced weaker than anticipated second quarter earnings Friday morning, blaming a weak global economic outlook and global freight overcapacity. Second quarter earnings per share will be $1.13, well below the Street’s consensus estimate of $1.18 per share. The firm also cut its full-year earnings outlook to $4.65-$4.85 per share compared to previous guidance of $4.80-$5.06 per share, but we suspect further downside is likely.
UPS’ primary competitor, FedEx (click ticker for report: ) cut its guidance several times during its 2013 fiscal year, and its recent fourth quarter results weren’t great, so UPS’ decision to cut its earnings outlook isn’t shocking. Both companies are dealing with the same basic issue: customers are no longer paying for premium shipping options, but instead are going with the cheapest route possible. With only modest macroeconomic growth in the US, customers have accepted slower shipping times for lower rates. The big risk for both UPS and FedEx, in our view, is that customers realize the marginal value of faster shipping isn’t worth the marginal cost (and cheaper shipping rates become the norm).
In a broader sense, we think UPS’ guidance cut speaks to the modest economic outlook for the global economy. The IMF, for example, recently cut its global growth projections (click here). China’s second quarter GDP registered 7.5% year-over-year, down from the first quarter growth rate of 7.7% (and we believe recent economic indicators in the country could signal further downside). Still, economic growth isn’t bad—it simply isn’t as strong as some investors would like. But a company as leveraged to economic growth as UPS could have a difficult time outperforming other less-cyclical investment opportunities. We’ll know more details when UPS reports full second quarter results July 23.
Valuentum’s Take
To put UPS’ earnings guidance cut in perspective, a full-year outlook of $4.65-$4.85 in earnings per share is only 4% lower than the previously-issued guidance. As such, the reduced outlook doesn’t materially change our long-term view of the firm, but it does highlight a shifting environment where an increasing number of customers are willing to accept slower shipping to save money. We consider shares of UPS to be fairly valued at this time and are not exploring a position in either of our actively-managed portfolios.