Taking into account concerns about the profit margins of its largest domestic business, the parcel delivery giant’s profit and revenue performance is not good enough to extend its recent gains, United Parcel Service Inc. shares plunged on Wednesday.
It fell 8.8% to US$155.78, the lowest closing price since August 6, and the largest one-day drop since the 9.9% drop on January 23, 2015.
As of Tuesday, UPS’s stock has risen 88.7% since the end of February, while the S&P 500 index SPX,
As the COVID-19 pandemic triggered a surge in e-commerce activity, UPS rose 14.8%, and UPS expects this situation to continue.
do not miss it: UPS stock rose after UBS analysts turned bullish the day before profit.
CEO Carol Tomé said: “From a customer-oriented perspective, the composition of the retail industry has changed dramatically, as e-commerce sales are now expected to account for 20% of all US retail sales this year. Above.” A post-earnings conference call based on the FactSet transcript. “Even after the pandemic, we don’t think the penetration rate of e-commerce retail will decline.”
Since May 15, the stock’s closing price has been below the closely watched 50-day simple moving average, which many Wall Street technicians use as a guide for medium-term trends.
Although the 50-day moving average (50-DMA) is still rising, which is still technically good news, the rise has slowed sharply and is expected to widen in the near future. MarketWatch’s analysis of FactSet data showed that the 50-day gain on Wednesday was 5 cents to $165.54, after an average daily increase of 61 cents for the first 19 days of the month. Read more about 50-DMA.
Before the opening on Wednesday, UPS reported that its adjusted profit in the third quarter rose to $2.28 per share from $2.07 per share in the same period last year, far higher than FactSet’s consensus estimate of $1.90.
Revenue increased by 15.9% to 21.24 billion U.S. dollars, which is about 1 billion U.S. dollars higher than FactSet’s consensus.
This is why investors seem to be disappointed:
The revenue of the domestic business sector in the United States accounted for approximately 62% of total revenue, an increase of 15.5% to reach US$13.23 billion, exceeding market expectations of US$13.05 billion. However, the division’s operating profit actually fell 9.7% to $1.1 billion.
This reduced the domestic operating profit margin from 10.6% to 8.3%.
CEO Tomé explained on the earnings call that profit margins have been hurt because the decision to complete its “fastest ever” initiative eight months in advance cost $179 million this quarter.
According to FactSet’s transcript, Tomé said: “This is the right approach because it helps UPS gain market share among small and medium-sized enterprises, but it undoubtedly puts a certain pressure on costs.”
Another reason for the decline in profits is lower-than-expected productivity, which is due to 40,000 new employees and increased employee turnover.
Tomé said: “Turnover is the result of many factors including frankly including COVID, but when you have a lot of new employees operating, sadly, our productivity is not as good as we should be.”
If this is not enough, Chief Financial Officer Brian Newman pointed out that the 2019 alternative fuel tax credit legislation reduced last year’s spending by $150 million, “it is not expected to be repeated.”
Amit Mehrotra, an analyst at Deutsche Bank, rated UPS as “Buy” and asked whether Tomé’s domestic business would return to positive in the fourth quarter The operating leverage ratio will be expanded in 2021.
Tomé replied: “This is not what I want to say,” turning to a positive attitude “will not happen until 2021.”
Cowen analyst Helane Becker reiterated its rating on UPS’s market performance and was optimistic about the performance and prospects, but admitted in a research report that UPS still has difficulty “bending the cost curve” in its domestic business.