MorningWord 1/23/15: $UPS Grounded

by Dan January 23, 2015 9:31 am • Commentary

Despite the tax cut consumers and businesses are receiving from lower oil, get ready to see the mother of all excuses for earnings misses in the term currency headwind.  It has been my view that lower for longer oil, one of the largest input costs for most U.S. multi-nationals, is not going to be a layup for profits as much of the benefit could be offset by the strength of the dollar, which has gone lockstep with oil weakness since last summer.

Just this morning United Parcel Service (UPS) issued a big earnings miss and guided down for 2015.  There were several reasons cited for the disappointing numbers, one surprising, weak domestic demand, and one not surprising, currency headwinds.

It seems like every step of the way of our economic recovery there has excuses why U.S. companies have failed to deliver meaningful top line revenue growth, yet companies continue to buyback shares with cheap money and manage bottom line growth, giving the appearance of growth and reasonable valuation.

Shares of UPS are trading down $10 in the pre-market, or about 9%.  What’s surprising to be me is that this sharp decline comes after yesterday’s breakout to new all time highs:

UPS 1yr chart from Bloomberg
UPS 1yr chart from Bloomberg

From purely a technical standpoint I suspect $105 (highlighted above in red) should be fairly staunch resistance, and a fairly good chance that we see $100 in the coming days.  But to reiterate, a $100 billion market cap company like UPS shedding nearly 10% of its market value from all time highs should be slightly disconcerting for investors.  It seems that so far in this earnings season investors are shooting first and asking questions later, with dramatic declines for misses with beats mildly rewarded (NFLX was definitely an outlier).

If we were playing would you rather heading into UPS Q4, I think it is safe to assume that UPS trading at 20x expected 2015 eps growth on expected sales growth of 5% vs Fedex (FDX) trading at the same forward earnings multiple with same expected sales growth, but 23% earnings growth, I think it’s a fairly easy choice.

At this point though, UPS’s 2.35% dividend yield gonna get a healthy pop close to $100, and could be a decent spot to take a shot on the long side if the stock gets washed out over the next couple of trading days as expectations will come down below guidance I expect.  We will keep our eyes on this one.