UPS (UPS) delivered Q2 earnings on Tuesday, and the report yields several interesting facts about where UPS stock is, where it’s going, and the state of the U.S. economy. In short, things look mighty rosy.
However, when you dig deeper into the numbers, you discover that there are reasons to worry about UPS stock.
In the U.S., revenue increased 2% to $8.8 billion, which isn’t terribly impressive. As it turns out, the increase was driven by an 8% spike in UPS’s SurePost product and a 15% increase in Deferred Air. I had no idea what these products were, but after reading about them, the increases make perfect sense.
UPS Stock Benefiting From Cost-Friendly Services
SurePost is a consolidate shipping service where you can ship using all the great logistics of UPS Ground, and all the packages for a given area are delivered not to each home, but to the U.S. Post Office that serves that area for final delivery. The result is that the UPS truck doesn’t have to visit every single home and business, saving UPS the fuel expense, the labor expense, and the wear ‘n’ tear on its vehicles.
SurePost also minimizes the possibility that the oh-so-reliable USPS will screw up the delivery. This is great for consumers who are trying to save money, because UPS passes the savings on to the client. So non-urgent packages get this treatment, saving folks as much as 30%.
The Deferred Air product allows for use of slower methods of shipping by air.
The conclusion is that people are prioritizing costs above rapid delivery, trying to save money in a weak recovery. If an option exists to save money, people choose it.
The other notable item in the U.S. segment was that revenue per package was flat, because fuel surcharges are being dropped as gas prices fall. It’s all a roundabout way of discovering that overall demand isn’t growing so much.
The story on the international side was that the strong dollar continues to affect profits. However, this headwind was offset by the fact that intra-European shipments grew 8.5%. For all the talk of Europe’s economic struggles, this data suggests that it isn’t affecting the shipping industry. The segment was also assisted by increasing efficiency on an operational level.
The Downside of UPS Earnings
However, as I drill into the P&L statement, I’m not crazy about what I’m seeing in UPS stock. We see that despite all I’ve mentioned, U.S. revenue only grew 1.6%, International revenue fell 6.4%, and supply chain and freight segment fell 4.5%. The end result is a 1.2% increase in revenue. There’s no growth here.
Note that operating expenses were cut by 10%. That’s great from a business standpoint, but if you didn’t notice this $1.39 billion decline, then you’d think the $1. 2 billion increase in total operating profit and $776 million increase in net income meant growth was spectacular. Hey, that’s a 171% year-over-year increase — earnings grew from 49 per share to $1.35! By the way, the same situation exists for the YTD numbers.
Well, it’s not so impressive knowing its due to expense cuts, is it? That’s why you drill into the financials instead of just believing headlines.
The good news for UPS stock is that free cash flow is fantastic — $3.26 billion YTD.
So, here’s my problem with UPS: We have a no-growth business trading at $100, or about 20x the expected EPS for FY15 of $5.20. There’s simply no way I can justify the price of the stock at these levels.
I don’t know why the market sent the stock up 5% as I write, and I would sell the stock now if you have it.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
