Shares of United Parcel Service, Inc. (UPS) have lost 10.4% ever since it announced below-par guidance for the fourth quarter as well as full-year 2014 on Jan 23. This leading package delivery company will report fourth quarter as well as full year 2014 results on Feb 3, 2015, before the commencement of trading on that day.
The company stated that it expects to record fourth-quarter adjusted earnings of approximately $1.25 per share. Following the below-par guidance, the Zacks Consensus Estimate has been revised downward by 22 cents from $1.47 per share.
Furthermore, the company slashed its adjusted earnings per share (EPS) guidance for the full year as well. UPS now expects adjusted EPS for 2014 to be around $4.75. Although the revised guidance represents 3.9% growth from the year-ago figure, it is well below the previously projected range of $4.90 to $5.00.The company’s full-year EPS guidance cut has caused the Zacks Consensus Estimate for 2014 to move south to $4.75 from $4.96.
Peak Season Costs Higher-than-Expected
UPS stated that even though package volumes and revenues were in line with expectations, operating profit was hurt due to higher-than-expected peak season expenses incurred by the company.
Weakness in the U.S. Domestic division of the company led to the lackluster guidance. We note that UPS had expanded its capacity (like hiring additional workers) to cope with the extra demand on Cyber Monday and Dec 22 (peak shipping days).
These were steps taken to ensure that it does not deliver a disastrous holiday season performance as experienced in 2013. However, the move to expand capacity backfired. Unfortunately, demand was lower than expected between the peak days which resulted in sub-optimized network during the peak season. The lower–than-expected volumes thus led to loss of productivity.
The higher peak season expenses due to overtime, contract carrier rates and training hours also put margins under pressure, entailing the weak guidance. Moreover, volume fluctuations due to the ongoing West Coast port dispute caused network disruption. Foreign currency fluctuations also adversely impacted the operating profit of the International package unit.
Going forward, the company intends to reduce operating expenses and implement new schemes with respect to pricing for holiday seasons.
2015 EPS Growth Projection Trimmed
In addition to the disappointing fourth quarter and full year 2014 projections, the company expects 2015 EPS growth to be slightly less than its long-term estimated range of 9% to 13%. Increased pension expenses ($180 million) and adverse foreign currency movements (in excess of $50 million) are expected to hurt 2015 earnings resulting in the muted growth projection.
FedEx Maintains FY15 Outlook
FedEx Corporation (FDX), which operates in the same field as UPS, reaffirmed its EPS guidance for fiscal 2015 (ending May 31, 2015). The company still expects earnings per share in the band of $8.50 to $9.00. The current Zacks Consensus Estimate of $8.94 lies close to the higher end of the company’s projected range.
Zacks Rank
Both United Parcel and FedEx carry a Zacks Rank #3 (Hold). Better-ranked stocks include TNT Express N.V. (TNTEY) and CH Robinson Worldwide Inc. (CHRW). Both the stocks hold a Zacks Rank #2 (Buy).
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