Based on nothing more than headlines, United Parcel Service, Inc. (NYSE:UPS) shares should be up today. The delivery company topped its fourth quarter sales and earnings estimates, and offered a fairly optimistic 2018 outlook. Yet, there it is. UPS stock is down 6% early Thursday in response to the earnings report. What gives?
As it turns out, the company was caught with its proverbial pants down during the quarter when holiday-driven shipping was its most frenzied. That is to say, the number of parcels it was processing peaked at a level above and beyond its effective capacity, that meant more costs.
Moreover, it means UPS will be spending heavily this year to make sure the bottleneck doesn’t take shape again. It may be a smart investment in its future, but it’s money shareholders weren’t counting on being taken off the forward-looking bottom line.
UPS Stock Earnings Recap
For the quarter ending in December, United Parcel Service earned an operating profit of $1.67 per share on revenue of $18.83 billion. Analysts were only calling for sales of $18.19 billion and a profit of $1.66 per share of UPS stock. UPS earned an adjusted profit of $1.63 per share in the same quarter a year earlier, when it drove revenue of $16.93 billion.
For the quarter in question, the company delivered 1.5 billion packages, topping the year-ago tally by 5.7%.
CEO David Abney commented on the fourth quarter numbers:
“We achieved our 2017 adjusted earnings-per-share target through exceptionally strong revenue and yield growth, coupled with benefits from our network investments and portfolio initiatives. We made significant progress on key capacity investments in 2017. Our momentum, transformative actions and the economic catalyst from the Tax Cuts and Jobs Act (TCJA), position UPS for growth in 2018 and beyond.”
The operational numbers, however, differed greatly from the GAAP numbers thanks to the advent of new tax laws. Had it not been for recent tax legislation, the company would have earned 30 cents less per share of UPS stock, though the adjustment for one-time expenses similarly added back to the final figure.
The actual reported bottom line, to be clear, means little this time around. Net income of $1.10 billion would have been $800 million greater had it not been for a one-time pre-tax pension expense to account for a mark-to-market charge.
On a per-share basis, that shaved 70 cents off the bottom line, but that negative impact was partially offset by the 30-cent benefit of the Tax Cuts and Jobs Act.
Also crimping profits was the $125 million expense related to parcel counts that were greater than the delivery network’s capacity. Additions made to that capacity during the quarter in question cost another $60 million.
That’s only the beginning though. The company has earmarked between $6.5 billion and $7.0 billion for new technology, aircraft (including 14 new 747s) and automated capacity.
Of the three segments United Parcel Service operates (supply chain and freight, international, and U.S.), supply chain was the bright spot. It saw year-over-year revenue growth of 21%. Even at the low-end of the growth scale though, its domestic revenue grew 8.4% thanks in part to higher shipping prices.
Its international arm saw 13% revenue growth for the fourth quarter, extending a long streak of progress. Abney noted “Our International segment has generated four consecutive quarters of double-digit export growth.”
Looking Ahead for UPS Stock
Perhaps the crux of Thursday’s weakness stems from the company’s guidance, not because it’s bad, but because investors were expecting guidance above and beyond current expectations. United Parcel Service said it was looking for per-share profits of between $7.03 and $7.39 per share in 2018, versus the consensus estimate of $7.21 per share of UPS stock.
Updated, and increased, spending plans looks like they’re going to take a toll for the foreseeable future, as the company sees more demand on the horizon that it’s just not ready to meet yet.
UPS delivery rival FedEx Corporation (NYSE:FDX) will report its fiscal third quarter numbers on March 20th.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.