United Parcel Service, Inc. (NYSE:UPS) booked its second crummy holiday shipping season in a row, causing UPS stock to fall hard Friday.
But this is just the sort of overreaction that could let you pick up shares at a discount.
Hey, UPS stock is a heck of a lot cheaper now than it was as of the previous night’s market close. Shares fell more than 10% at one point in morning trading, lopping off about $10 billion in market value.
That’s a pretty big whack for a company that blew quarterly results on higher costs.
Of course, UPS incurred those ruinous costs to avoid a repeat of 2013, which was a disaster when the company couldn’t deliver millions of packages in time for Christmas.
UPS pledged to add up to 95,000 temporary workers to handle the holiday rush, but that turned out to be overkill. All that extra capacity was needed to handle the wave of deliveries in the days leading up to Christmas, UPS said, but volume was much lower than expected on other days of the holiday season.
The resultant training and overtime hours and drop in productivity then hit the bottom line with an additional $220 million in operating costs.
No wonder UPS is falling so hard in light of its profit warning. A year ago, the stock tumbled after the holiday report and took most of the year to recover. Indeed, shares waited to rally until November, and then only on anticipation of a strong holiday shipping period.
Fittingly, UPS stock is about back to where it was before last year’s disaster.
UPS Forecasts Clobber the Stock
UPS warned that fourth-quarter earnings would be very disappointing. UPS expects earnings per share to come in at $1.25 a share, well below the Street forecast for $1.47, according to a survey by Thomson Reuters.
For 2015, UPS said the strong dollar, pension expenses and other factors will cause earnings growth to come up short of its prior forecast for 9% to 13% growth.
The full-year 2015 forecast flies in the face of the easy bull case for UPS stock. True, holiday missteps two years in a row doesn’t instill confidence in the management team, but an accelerating U.S. economy should help bail out UPS as the year progresses.
After all, weak global demand has been weighing on UPS and FedEx Corporation (NYSE:FDX) throughout the recovery. Theoretically, UPS’s focus on the domestic market should lead to a pick up in revenue now that the economy is getting healthier. At the same time, tumbling fuel prices should ease its cost burden.
That said, the decline probably does afford investors an opportunity to get UPS stock on the cheap. For one thing, knee-jerk selloffs are almost always overdone. Additionally, UPS stock looks to offer a compelling valuation. Hey, it’s cheaper than the broader market on a forward earnings basis despite having a higher growth forecast.
Roughly $10 billion in UPS market cap went poof in a single morning. That should amply discount the stock for the quarterly shortfall and profit warning.
UPS stock isn’t a red-hot screaming buy, but it has the makings of a longer-term market-beater.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
