High Costs, Low Growth Doom UPS Stock

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United Parcel Service, Inc.’s (NYSE:UPS) fourth-quarter earnings matched analysts’ and the company’s own estimates, but only because UPS slashed its outlook a couple of weeks ago. Now that UPS is projecting a downbeat 2015, it looks like there’s more weakness for UPS stock to come.

High Costs, Low Growth Doom UPS StockUPS told the market in late January that it just wrapped up its second consecutive crummy holiday shipping period. UPS didn’t want to get caught flatfooted like it did a year ago, when it didn’t have the manpower to make millions of deliveries in time for Christmas. So it added nearly 100,000 temporary workers — a huge increase even by the temp-hiring standards of the holidays.

Unfortunately for UPS, the plan backfired when the expected volume of packages didn’t materialize. 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.

Overall, fourth-quarter UPS earnings were $453 million, a drop from nearly $1.2 billion a year ago. Earnings per share were 49 cents compared to $1.25 per share for the same quarter of 2013. Before the profit warning, however, analysts were looking for earnings of $1.47 a share.

Revenue was $15.9 billion, an increase from $15 billion a year earlier. That was slightly ahead of Street estimates of $15.8 billion, according to data from Thomson Reuters.

Higher costs were the killer — operating expenses increased by more than $2 billion in the quarter to $15.1 billion — and they’ll continue to weigh on profits this year, too.

The stronger U.S. dollar and rising pension expenses led UPS to forecast 2015 earnings at $5.05 to $5.30. That’s short of the Street’s outlook for earnings of $5.05 to $6 a share.

UPS Stock Under Pressure

UPS did a decent job of preparing the market for the disappointing quarterly results. UPS stock actually rose slightly in early trading.

As we noted when UPS issued its warnings, the market’s reaction appeared to be overdone. Indeed, UPS stock lost more than 10% — good for about $10 billion in market cap — on the news.

Well, UPS stock has now lost 12% since the profit warning and the bias remains to the downside. Maybe if  UPS had not given a downbeat 2015 forecast, shares might have started to reverse course.

At this point, however, UPS isn’t doesn’t look like it’s going to become an up stock in a down market. Growth worries are stalking the market and that goes the same for UPS. Why should UPS be an outperformer in such an environment?

Furthermore, as much as UPS was beaten down on its disappointing earnings and outlook, it’s  not clear that it’s cheap enough yet to suck in value buyers. UPS stock is still slightly more expensive than it’s own five-year average on a forward earnings basis, for one thing. UPS stock is also more expensive than the broader market.

With no catalysts to break the spell on UPS stock, sideways trading is probably about the best the market can hope for these days — or at least until it releases first-quarter earnings.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/high-costs-low-growth-doom-ups-stock/.

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