MorningWord 7/12/13: What’s Big Brown & Messy This Morning? $UPS

by Dan July 12, 2013 9:19 am • Commentary

MorningWord 7/12/13:  Just a few minutes ago, UPS pre-announced a worse than expected Q2 and guided down the full year eps about 5% below consensus estimates.  While the press release is short (here) as the company will hold their official earnings call on July 23rd as originally planned, there is one little nugget in the opening paragraph that is worth highlighting, the company partially blames the miss and guide down on a “slowing U.S. industrial economy”.   For a company that is (was, looking down ~5% in the pre-market) trading at all time highs, up 24% on the year, fairly dramatically out-performing the broad market and its main peer FDX, this is a fairly surprising revelation.  The chart below showing UPS’s stock performance since its existence as a public company had technicians jumping out of their seats with the possibility of a runaway breakout.

UPS chart since IPO in 1999 from Bloomberg
UPS chart since IPO in 1999 from Bloomberg

A big part of UPS’s ytd performance relative to FDX  has a lot to do with lower dependence on international sales for future growth, so the fact that the company is citing domestic sluggishness is a bit surprising.  When FDX reported their fiscal Q4 in late June, the company beat but cited sluggish demand from Asia for a more restrained near-term outlook, which some investors chose not to extrapolate much to UPS at the time.

UPS is a perfect example of a company that had been given maybe a tad more credit than might be deserved given the back drop of a weak global economy.  The stock isn’t exactly cheap, trading at 20x earnings, which are expected to grow in high single digits, on sales that are expected to grow at low single digits.  But UPS’s performance goes back to what was working very well in the U.S. market until May – high dividend payer, strong balance sheet, large share repurchase and levered to domestic economy.  Did one of the large pillars of that story just get knocked out from under?

As we head into earnings, and given the Fed Chairman’s recent backtrack on the U.S. economic outlook, UPS’s quick comment could be a “canary in a coal mine” as most investors had been bracing for U.S. multinationals to blame international weakness for any disappointments, not domestic.