A surprise drop in revenue hurt UPS (UPS) stock Tuesday even as the global shipper’s profit beat Wall Street estimates and it affirmed its full-year forecast.
Perhaps the market was spooked by how much of an effect the strong dollar is having on UPS earnings, or maybe it was expecting the company to issue a more optimistic forecast.
Either way, the selloff seems a bit severe.
UPS stock — with a market capitalization of $93 billion — fell as much as 4% before the opening bell. UPS stock is now off about 7% for the year to date.
The market is right to be cautious with UPS heading into the critical holiday selling season. After all, UPS muffed it last year — and the year before that.
The macroeconomic picture also remains tough. The strong dollar is crimping sales at all U.S. multinationals, and there’s no end in sight to that currency headwind. Sluggish global growth led by a weaker Chinese economy is also hurting corporate sales and profits.
But UPS offered an encouraging forecast for the upcoming holiday selling period, and the wider retail sales backdrop looks pretty good too.
UPS told analysts that package volume during the peak season between Thanksgiving and New Year’s should increase 10%.
It’s certainly possible that the market was disappointed with that estimate in light of rival FedEx’s (FDX) own 12.4% forecast, but let’s not get greedy. That’s essentially in line with the year-ago forecast and it’s always better to under-promise and over-deliver.
As for the bigger picture, the National Retail Federation predicts a 3.7% rise in retail sales this holiday season to $630.5 billion, excluding auto, fuel and restaurant sales. That would be slower than the year-ago figure of 4.1%, but it should be more than adequate help UPS beat some easy year-over-year comparisons.
Holiday Execution Is the Key for UPS
Besides, the issue for UPS the last couple of years wasn’t an absolute shortfall in volume — it was how the company planned for it.
In 2013, bad weather and higher-than-expected volume meant that millions of packages didn’t get to their destinations. Last year UPS pledged to add as many as 95,000 temporary workers to handle the holiday rush, but that turned out to be overkill when the expected increase in volume didn’t materialize.
The revenue miss in the most recent quarter is disconcerting, but it shouldn’t come as a surprise. Foreign currency exchange has become a serious problem for all companies. Lower fuel surcharges also played a role.
UPS revenue fell to $14.2 billion from $14.29 billion. Analysts, on average, expected revenue to rise 1% to $14.43 billion, according to a survey by Thomson Reuters. If UPS is lucky, the Street will be more cautious with its top-line projections going forward. The company has now missed revenue estimates for three straight quarters.
That said, UPS earnings rose to $1.26 billion, or $1.39 a share, from $1.21 billion, or $1.32 a share. That topped the Street estimate by two cents a share.
That’s really neither here nor there at this point. All that matters is how UPS manages costs over the holiday period.
With the market looking very skeptically at the company’s ability to plan, shares have a chance for some nice upside if UPS can make this third time a charm.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
