UPS Delivers Frightening Forecast

By Sasha Cekerevac for Investment Contrarians | Jul 26, 2012

• Tweet
  
  
• 
  
  
• 
  
  
• 
  
  
• Email

• Tweet
  
  
• 
  
  
• 
  
  
• 
  
  
• Email

There are many interesting points that can be taken from a quarterly corporate earnings report. I find it’s quite interesting to read the corporate earnings release from United Parcel Service, Inc. (NYSE/UPS), because its business is spread among so many sectors and nations around the world that it’s a good gauge of where the global economy currently is and what the company’s economic forecast holds for the future. Unfortunately, the latest economic forecast from UPS’s corporate earnings release was quite scary.

Compared to most economists, UPS is expecting weaker global trade within a poor economic forecast. Because of this weak economic forecast, UPS is undergoing reductions in its business and lowering guidance. Within its corporate earnings release, UPS states that customers are increasingly worried about the economy. This is causing other firms to ratchet down their own economic forecast models for the remainder of the year. For the second quarter, UPS did miss on both topline and corporate earnings expectations as a result of weakening demand by clients. UPS has an economic forecast for the American economy of just one percent. That is far below the economic forecast for many economists, as most have a range of 1.5% to two percent.

Within the corporate earnings release, one bright spot was higher shipments from online retailers. But this increase was not enough to offset the decrease in freight shipping, which is the method large businesses use when ordering products. Obviously, someone buying one book from an online retailer can’t match the revenue and corporate earnings that UPS gains from a manufacturer shipping 1,000 units.

Asian growth is slowing as well, and because of this, UPS is cutting flights and capacity to that region by approximately 10.0%. The company does cite one positive note for the end of the year when new product launches by firms like Apple Inc. (NASDAQ/AAPL) are scheduled; but I doubt this will be enough to offset the weakening economic forecast globally.

Chart courtesy of www.StockCharts.com.

Following the poor corporate earnings release, the stock sold off significantly, landing at some support around its 200-day moving average. This is also the 38.2% interest level, using the Fibonacci calculation. While many might be tempted to step in to accumulate shares at a discount to recent price levels, I would urge caution. UPS’s corporate earnings release was littered with headwinds for its business and the global economy. With such a global slowdown, having a weak economic forecast below consensus indicates that the situation might be worse than many economists believe. If this is the case, there isn’t a short-term catalyst to drive the stock up. If anything, it might trend sideways or slightly down until the economic situation has stabilized globally. A reasonable approach would be to wait for any uptake in the economic forecast by UPS, or signs of some positive notions within their next corporate earnings release.

Tags: corporate earnings, economic forecast