UPS Profit Margins Under Pressure

United Parcel Service Inc. (UPS) reports Q1 2022 results in Tuesday’s pre-market session, with analysts looking for a profit of $2.88 per-share on $23.8 billion in revenue. If met, earnings-per-share (EPS) will mark a modest improvement compared to the $2.77 booked in the same quarter last year. Rival FedEx Corp. (FDX) fell 4.0% in March after missing fiscal Q3 earnings estimates and reaffirming guidance, generating a cautious tone ahead of the news.

Freight and Fuel Pressuring Margins

The stock fell ten sessions in a row at the start of April, signaling a major shareholder exodus, ahead of this week’s closely-watched confessional. A Bank of America downgrade after the seventh day added insult to injury, dumping price to the lowest low since October. Slumping freight prices explain most of the downside, with additional capacity putting pressure on profit margins, further aggravated by fuel costs hitting their highest highs in more than a decade.

BofA Securities analyst Ken Hoexter downgraded UPS to ‘Hold’ from ‘Buy’ on Apr. 15, lowering the firm’s price target to $204. JPMorgan analyst Brian Ossenbeck followed suit, cutting the price target to $229 while citing “the fragile balance of capacity additions in an overheated freight market.”  It’s instructive to note that freight rates across the board have dropped since those downgrades but it’s too early to declare a change in trend.

Wall Street and Technical Outlook

Wall Street consensus has deteriorated in the last three months, dropping to an ‘Overweight’ rating based upon 14 ‘Buy’, 3 ‘Overweight’, 11 ‘Hold’, 1 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $150 to a Street-high $275 while the stock is set to open Monday’s session more than $55 below the median $245 target. This low placement suggests firms are doing a bad job informing clients about systemic risks in the transportation sector.

United Parcel Service broke out above the 2018 peak at 135.53 in August 2020, entering a powerful uptrend that stalled near 220 in May 2021. November and February breakout attempts failed, yielding a selling wave that dropped the stock within six points of October range support at 181. It’s been grinding sideways at that level for the last two weeks while accumulation has dropped to a six-month low. Bull and bear odds are equally weighted after the news but a long-term sell cycle could yield lower prices through most of the quarter.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

World’s Largest Courier Company, UPS Plans on Entering the Metaverse

Key Insights:

  • United Parcel Service (UPS) filed multiple Metaverse and NFT related trademark applications.
  • UPS’ Metaverse filings will set a precedent for similar applications from other shipping and logistics brands.
  • Metaverse, at this point, has just become a medium of marketing for every brand & company.

As revealed by DC-based NFT trademark attorney Michael Kondoudis, the United Parcel Service (UPS) is preparing to establish a Metaverse presence. The move will bolster the already strong reach the company has in the world, to the virtual world as well.

Parcels in the Metaverse

The trademark filings range from basic NFT and Metaverse goods to creating a new network of shipping and deliveries as well. Although only six filings have been discovered, these six filings include goods and services such as:-

  • NFTs and Crypto-collectibles.
  • NFT backed multimedia.
  • Virtual retail shipping and delivery.
  • Virtual clothing, packages, vehicles, airplanes, and sports collectibles.
  • Marketplaces for digital goods and NFT backed media.
  • Retail stores featuring virtual goods.

According to Kondoudis, the 114-year-old company is taking these steps to protect its “UPS” brand, which is why these filings hold a lot of value. Thus through these filings, the company was preparing to dominate the virtual economy and become a major player in this space. Adding to the same, he said,

“We expect the number of trademark filings for NFT and virtual products and services from the shipping, logistics, and package delivery sector to increase in the next 12 months as brands come to appreciate the need for protection in the Metaverse.”

This is what the new trend is, and it’s alluring companies all over the globe to follow it or be outdated.

The Metaverse Dillemma

In the last few weeks, more companies have filed Metaverse trademarks applications than one would expect, and these companies aren’t limited to just one sector either.

Brands ranging from fashion to technology and music and fast food companies have been quick to file their trademarks in the Metaverse so that when the time comes, they will be equipped to establish their presence.

Last month KFC, Pizza Hut, and Taco Bell followed similar plans and set foot in the Metaverse. The month before that, McDonald’s did the same thing as well.

At the same time, the New York Stock Exchange and Victoria’s Secret too announced their intentions by filing for similar trademarks. And just yesterday, FXEmpire reported on MasterCard repeating this strategy for itself.

Thus, finding a pattern in these filings is pointless. The only driving factor behind these decisions is creating their brands’ presence in the quickly emerging virtual world.

The Metaverse hype is growing by the day, and companies are treating it as a marketing strategy, but whether or not it will be a long-term success is yet to be known since the space is still in its early stages.

Shares Of Logistics Giant UPS Surge Nearly 10% To Hit Record High After Q4 Earnings

United Parcel Service (UPS) shares hit a new record high in pre-market trading on Tuesday after the logistics giant reported better-than-expected earnings in the fourth quarter and its revenue estimates for this year topped expectations.

The Atlanta-based company reported quarterly adjusted earnings of $3.59​​ per share, beating the Wall Street consensus estimates of $3.10 per share. The company, which is one of the largest global shipping and logistics companies in the world, said its revenue jumped over 11% to $27.77 billion from a year ago. That too topped the market expectations of $27.06 billion.

UPS expects to deliver its 2023 consolidated revenue and operating margin targets one year early. For the full year 2022, the company expects consolidated revenue of about $102 billion, an adjusted operating margin of approximately 13.7% and adjusted return on invested capital to be above 30%.

The company is planning capital expenditures to be 5.4% of revenue or approximately $5.5 billion, dividend payments to be around $5.2 billion, subject to Board approval, and share repurchases to be at least $1.0 billion. The effective tax rate is expected to be around 23.0%.

United Parcel Service (UPS) stock surged nearly 10% to hit a record high of $221.64 in pre-market trading on Tuesday. The stock fell over 5% so far this year after surging more than 27% in 2021.

Analyst Comments

UPS reported 4Q21 EPS well above our and consensus estimates. As promised, the Board raised the dividend by 49% to $1.52 / quarter from $1.02 and our estimate of $1.40. The company ended the year with strong volumes and momentum heading into 2022. Full-year revenue of $97.3 billion was a record,” noted Helane Becker, Equity Analyst at Cowen.

“They obviously continue to see strong demand for their services, which we also expect will continue given the ease of ordering online vs going to the store.”

United Parcel Service (UPS) Stock Price Forecast

Seven analysts who offered stock ratings for United Parcel Service (UPS) in the last three months forecast the average price in 12 months of $227.50 with a high forecast of $250.00 and a low forecast of $191.00.

The average price target represents a 12.51% change from the last price of $202.21. Of those seven analysts, four rated “Buy”, three rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $135 with a high of $255 under a bull scenario and $50 under the worst-case scenario. The investment bank gave an “Underweight” rating on the logistics giant’s stock.

“We see competitive secular threats to the Parcel business as a triple threat of (1) Insourcing by eCommerce giants (2) Omnichannel shift enabling last-mile competition from mid-size retailers and (3) Platformization of small-shipper volumes. Together, these trends could erode returns in the B2C space, which has been a huge driver of growth for the legacy parcels in recent years,” noted Ravi Shanker, equity analyst at Morgan Stanley.

“Despite its strong operating metrics, United Parcel Service (UPS) could be more at risk of disruption given its larger B2C business (and AMZN exposure), fewer self-help initiatives than FDX and more expensive valuation.”

Several other analysts have also updated their stock outlook. BofA Global Research cut the price objective to $236 from $244. Credit Suisse started coverage with outperform rating and set the target price at $263. JPMorgan raised the target price to $243 from $240. Baird lifted the target price to $225 from $220.

Technical analysis suggests it is good to buy as 100-day Moving Average and 50-200-day MACD Oscillator signals a strong buying opportunity.

Check out FX Empire’s earnings calendar

Wall Street Week Ahead Earnings: Alphabet, PayPal, Exxon Mobil, Meta, Qualcomm and Amazon in Focus

Investors will focus on December quarter earnings for stocks that are economically sensitive, which should show better profits than technology stocks. Increasing Treasury yields and risk aversion will hit the stock market hard next week, making the big tech earnings that much more critical. In addition, investors will closely monitor the latest news on the rapidly spread Omicron coronavirus variant to see how it impacts earnings in 2022.

Earnings Calendar For The Week Of January 31

Monday (January 31)

TICKER COMPANY EPS FORECAST
CBT Cabot $1.06
CRUS Cirrus Logic $1.91
FN Fabrinet $1.28
HLIT Harmonic $0.09
NXPI NXP Semiconductors $2.67
PCH PotlatchDeltic $0.48
RYAAY Ryanair Holdings $-0.15
SANM Sanmina $0.91
TT Trane Technologies $1.31
WWD Woodward $0.83

 

Tuesday (February 1)

IN THE SPOTLIGHT: ALPHABET (GOOGLE), PAYPAL, EXXON MOBIL

ALPHABET: The parent of Google and the world’s largest search engine that dominates internet search activity globally is expected to report its fourth-quarter earnings of $26.71 per share, which represents year-over-year growth of about 20% from $22.3 per share seen in the same period a year ago.

The Mountain View, California-based internet giant would post revenue growth of nearly 27% to $72.133 billion from $56.9 billion a year ago. It is worth noting that the company has consistently beaten consensus earnings estimates in the last two years, at least.

“Key Alphabet (GOOG) ’22 Ad Buyer Survey conclusions: i) Google Search remains highest ROI platform; ii) YouTube expected to gain ad share ’21-’23; & iii) GOOG Search & YouTube are the top platforms for ad buyers reallocating budget due to iOS changes. We est. GOOG’s share of WW Digital adv. (x-China) goes from 41% to 37% ’22-’27. We extended model to ’27, PT to$3,500 vs. prior $3,360, reiterate Outperform,” noted John Blackledge, equity analyst at Cowen.

PAYPAL: The digital payments company is expected to report its fourth-quarter earnings of $0.86 per share, which represents year-over-year growth of about 15% from $0.75 per share seen in the same period a year ago. The San Jose, California-based company would post revenue growth of over 12% to around $6.9 billion.

EXXON MOBIL: The oil company will see its earnings rise multi-fold in the fourth quarter thanks to higher energy prices and a waning pandemic that helped it bounce back after a tough period in 2020.

The Irving Texas-based company is expected to report its fourth-quarter earnings of $1.73 per share, which represents year-over-year growth of over 5,666%, up from $0.03 per share seen in the same period a year ago.

The U.S. largest publicly traded oil company is expected to report a 97.3% increase in revenue to $91.845 billion from $46.54 billion a year ago. On Dec 30, the Irving Texas-based company in its regulatory filing said that higher oil and gas prices would enable it to achieve annual profitability starting in 2021 with an operating profit increase of up to $1.9 billion.

The U.S. largest publicly traded oil company hinted that oil and gas earnings could decrease by up to $1.2 billion as a result of one-time charges for asset impairments and contractual costs. Exxon announced late last year announced that a sharply higher operating profit in oil and gas, prompting Credit Suisse, Scotiabank, and JPMorgan to raise their fourth-quarter earnings estimates.

“Improving FCF outlook and dividend sustainability. With a more constructive commodity price outlook, lower capital spending, and additional cash operating cost savings, the dividend is covered in 2021 and averages >100% over the next 5-years on our estimates. Improving dividend sustainability supports yield compression for Exxon Mobil (XOM) relative to CVX,” noted Devin McDermott, Equity Analyst and Commodities Strategist at Morgan Stanley.

“Cost cuts defend the dividend. In 2020, Exxon Mobil (XOM) reduced 2022-25 spending plans to $20-25B from $30-35B (recently extended to 2027), improving dividend sustainability while limiting further pull on the balance sheet. Additionally, Exxon Mobil (XOM) is targeting $6B in structural operating cost reductions by 2023 which should put upward pressure on consensus FCF estimates.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 1

TICKER COMPANY EPS FORECAST
AMD Advanced Micro Devices $0.69
AMCR Amcor $0.18
ASH Ashland Global Holdings $0.93
CTLT Catalent $0.79
CB Chubb $3.34
EA Electronic Arts $2.81
XOM Exxon Mobil $1.73
GM General Motors $0.84
NMR Nomura Holdings $0.2
SBUX Starbucks $0.8
UBS UBS Group $0.24
UPS United Parcel Service $3.05

 

Wednesday (February 2)

IN THE SPOTLIGHT: META PLATFORMS (FACEBOOK), QUALCOMM

META PLATFORMS (FACEBOOK): The world’s largest online social network is expected to report its fourth-quarter earnings of $3.78 per share, which represents a year-over-year decline of over 2% from $3.88 per share seen in the same period a year ago.

The Menlo Park, California-based social media conglomerate would post revenue growth of over 30% to around $33.04 billion. The social media giant has consistently beaten consensus earnings estimates in most of the quarters in the last two years, at least.

QUALCOMM: The world’s biggest mobile phone chipmaker is expected to report its fiscal first-quarter earnings of $2.77 per share, which represents a year-over-year decline of over 40% from $1.97 per share seen in the same period a year ago.

The chip manufacturer would post revenue growth of nearly 27% to $10.45 billion. It is worth noting that the company has consistently beaten consensus earnings estimates in the last two years, at least.

Qualcomm forecasts GAAP revenue in the first quarter of fiscal 2022 to be between $10 billion and $10.8 billion. On a non-GAAP basis, earnings will likely range from $2.90 to $3.10 per share, while GAAP earnings will likely range from $2.53 to $2.73 per share, according to ZACKS Research.

“After underperforming the SOXX for most of 2021 until a sharp rally late in the year, we see a strong setup for a now Apple-overhang-free Qualcomm in 2022 as investors begin to appreciate the diverse revenue drivers beyond Wireless. Expect solid print and guide, with focus on execution and growth in the connected intelligent edge and update our estimates accordingly,” noted Matthew Ramsay, equity analyst at Cowen.

“We reiterate our price target of $210 based on 17.5x our F2023 EPS estimate of $12.0 and our Outperform rating.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 2

TICKER COMPANY EPS FORECAST
EAT Brinker International $0.5
CHRW C.H. Robinson Worldwide $1.85
CPRI Capri Holdings $1.67
CTSH Cognizant Technology Solutions $1.03
RACE Ferrari $1.08
FB Meta Platforms $3.78
MET MetLife $1.63
TMUS T-Mobile $0.2

 

Thursday (February 3)

IN THE SPOTLIGHT: AMAZON

The e-commerce leader for physical and digital merchandise, Amazon, is expected to report its fourth-quarter earnings of $3.9 per share, which represents a year-over-year decline of over 70% from $14.09 per share seen in the same period a year ago.

However, the Seattle, Washington-based multinational technology giant would post revenue growth of about 10% to around $138 billion. The company has beaten earnings per share (EPS) estimates most of the time in the two years.

“We are reiterating our BUY rating and our price target to $3,900. Our price target is based on our updated discounted cash flow model, including our long-term adj. EBITDA margin forecast of 22.0% versus 13.7% in 2020,” noted Tom Forte, MD, Senior Research Analyst at D.A. DAVIDSON.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE FEBRUARY 3

TICKER COMPANY EPS FORECAST
ABB ABB $0.38
ALL Allstate $2.72
COP ConocoPhillips $2.23
LLY Eli Lilly $2.37
HON Honeywell International $2.09
PRU Prudential Financial $2.44
SU Suncor Energy $0.95
SYNA Synaptics $2.63

 

Friday (February 4)

TICKER COMPANY EPS FORECAST
APD Air Products & Chemicals $2.51
AON Aon $3.33
BMY Bristol Myers Squibb $1.85
CBOE Cboe Global Markets $1.41
ETN Eaton $1.73

 

XLI: Industrials Should Continue to Benefit From the Rotation Away from Tech

The tech-heavy NASDAQ composite as shown in the blue chart below has been losing ground since the first week of December, by -3.7% thereby negating some of its precedent episodic upsides. Now, the fact that the Dow Jones industrial gained 1.9% (purple chart) during the same time period shows that investors are rotating away from technology and returning to the more cyclical sectors of the economy like industrials.

https://static.seekingalpha.com/uploads/2022/1/6/49663886-16414790677625177.png

Source: cnbc.com

Looking at the sector, after having delivered a 16.36% one-year gain, the Industrial Select Sector SPDR (XLI) finished the week ending Dec. 31 in the green +1.82%, while the SPDR S&P 500 Trust ETF (SPY) rose by +0.93% for the week and finished the year with a 27.04% gain. Therefore, the current momentum induced by the DJIA and a comparison with the broader market (S&P 500) shows that XLI or any other ETF with Industrials has the potential to produce further upside.

Hence, scanning the passive investment vehicle space, with an expense ratio of 0.12%, there are peers like the Vanguard Industrials ETF (VIS) and the Fidelity MSCI Industrials Index ETF (FIDU), whose fund managers charge less, or 0.10% and 0.08% respectively. However, the SPDR fund’s appeal at the current juncture is its higher dividend yields at 1.23% due to the U.S. Fed likely accelerating the pace at which it will hike interest rates.

In order to achieve such a yield, XLI tracks the Industrial Select Sector Index. This index seeks to provide an effective representation of the industrial sector of the S&P 500 index which signifies very large corporations while providing investors with exposure to the following industries: aerospace and defense; industrial conglomerates; marine; machinery and transportation infrastructure. Holdings also include road and rail, air freight and logistics plays as well as airlines.

https://static.seekingalpha.com/uploads/2022/1/6/49663886-1641479067781248.png

Source: ssga.com

Looking deeper, some of the names like United Parcel Service (UPS), Union Pacific Corporation (UNP), Raytheon Technologies Corporation (RTX), and Honeywell Corp (HON) have their Price to Earnings ratios varying from 27x to 40x. This brings us to one of the rationales for owning an ETF, in contrast to highly-valued popular stocks. In this case, XLI bears lower valuations with a P/E of only 26.25.

Furthermore, these are XLI’s top four holdings, each with a market cap of over $100 billion. They have delivered gains ranging from 3.7% to 10.4% in the past month and this looks like to continue while tech takes a beating.

Pursuing on a cautionary note, the higher probability of faster-than-expected U.S. rate hikes and the Fed hawkish tone has also impacted the DJIA which dropped by 1.1% on Wednesday. Therefore, there may be other short-term pains and some may prefer to wait for the SPDR ETF to come slightly down from the $105-106 range, (which constitutes an all-time high), before investing in order to benefit from a better margin of safety.

Finally, with the macroeconomic backdrop remaining positive, the Omicron spread not resulting in more hospitalizations, and the recovery being well on track, XLI could rise to the $108-110 range by mid-2022 and in the worst-case scenario of an unexpected downturn, its mega-caps should prove useful to insulate investors against abrupt stock market fluctuations.

 

Better Days Ahead for Fedex?

Fedex Corp. (FDX) reports fiscal Q2 2022 earnings after Thursday’s closing bell, with analysts looking for a profit of $4.29 per-share on $22.42 billion in revenue. If met, earnings-per-share (EPS) will mark a 12% profit decline compared to the same quarter in 2020. The stock plunged 9.1% in September after missing Q1 estimates by a wide margin and lowering 2022 guidance. It fell another 6% to a 14-month low in October and bounced, filling the post-earnings gap in November.

2022 Labor Market Advantage

The company blamed a “constrained labor market” for the Q1 shortfall, generating a wave of analyst downgrades. Sentiment has not improved since that time, with wage pressures growing throughout the United States and around the world. Concerns about a weak holiday season and  Omicron-induced slowdown are adding to these headwinds, encouraging investors to sit on their hands until the profit landscape becomes more transparent.

Deutsche Bank analyst Amit Mehrotra recommended the stock in a backhanded way at the end of November, noting that rival United Parcel Service Inc. (UPS) faces tough contract talks with the Teamsters union, raising the potential for the first labor stoppage since 1997. He believes Fedex would benefit if that happens, noting “This makes FDX shares more attractive over the next 12-18 months, in our view, given its non-union employee base and a cost structure that better reflects real-time labor inflation.”

Wall Street and Technical Outlook

Wall Street believes that Fedex is undervalued at this time, posting a consensus ‘Strong Buy’ rating based upon 17 ‘Buy’, 4 ‘Hold’, and no ‘Sell’ recommendations. Price targets currently range from a low of $250 to a Street-high $369 while the stock is set to open Thursday’s session nearly $6 below the low target. This dismal placement suggests limited downside after the report but uncertainly is likely to impact price action well into the first quarter of 2022.

Fedex completed a round trip into the 2018 high at 274.66 in October 2020 and broke out, but the uptrend failed after posting an all-time high at 319.90 in May 2021. The stock relinquished more than 30% of its value into October, ahead of a weak bounce that failed to mount 50- or 200-day moving average resistance. This bearish action tells us the downtrend remains in control and likely to keep pressure on the shipping giant in coming months.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

How Supply Issues could Influence SP500?

At the same time, many businesses continue to announce plans for further price increases, with most facing higher cost pressures. It will be interesting to see how or when the U.S. consumer starts to pull back.

Upcoming price increases

UPS yesterday was the latest to announce upcoming price increases, joining companies like Kimberley-Clark, Procter & Gamble, Nestlé, and Chipotle, to name just a few that are attempting to offset higher input costs. These moves reinforce the bears argument that inflation will prove to be longer-lasting than the Federal Reserve’s stance that the wave of higher prices is only “transitory.”

Judging from regional Federal Reserve Manufacturing Surveys that have been updated so far, challenges related to supply chain dislocations and labor shortages continue to contribute to the inflationary environment. Meaning manufactures are still struggling to expand output amid raw material shortages, higher input costs, transportation bottlenecks, and a lack of qualified workers. There have been minor improvements with the pace of cost increases easing a bit and respondent outlooks turning more positive.

It will take more than one month of slightly better data for investors to believe the worst of the supply chain mess is behind us, though.

Data to watch today

Economic data today includes advanced reads on Retail and Wholesale Inventories for October. Bulls are hoping inventories have managed to climb from depressed levels brought on by supply chain challenges, especially as we head into the holiday shopping season. Remember, if companies don’t have the products to sell it will be tough to meet earnings and growth forecasts.

Durable Goods Orders for September is also due today. Oil traders today are anxious to see the Energy Information Administration’s weekly oil inventory report after both Brent and WTI oil futures yesterday closed at their highest levels since 2014 when oil was trading close to $100 a barrel.

Investors this morning will also be digesting the Bank of Canada’s latest policy decision. Insiders are expecting the central bank to raise its inflation forecast and further cut its bond purchases. Another reduction will mark the fourth time in the past year that the Bank of Canada has “tapered” its asset purchases, something most other central banks have not yet begun. The Bank of Canada could also announce when it intends to begin interest rate hikes, with some analysts anticipating liftoff as soon as March due to rising inflation.

Such a move could increase fears that other global central banks, including the U.S. Fed, will feel pressured to act more aggressively to combat inflation. Meaning analysts could begin moving up timelines for when the Fed might end asset purchases and begin rate hikes, something that could weigh on bullish outlooks.

Earnings

It’s another busy day for earnings with highlights including BASF, Boeing, Bristol Myers Squibb, CME Group, Coca Cola, eBay, General Motors, Hilton Worldwide, Kraft Heinz, McDonald’s, Norfolk Southern, O’Reilly Automotive, Thermo Fisher, and Twilio. Alphabet (Google) and Microsoft announced after the market close yesterday with both blowing expectations out of the water.

Notably, Google’s advertising revenue, which rose +43%, didn’t appear to take any hits from changes made to Apple’s privacy policies, something cited by both Facebook and Snap. Both Google and Microsoft also saw continued robust growth in their cloud divisions with revenue climbing +45% and +31% respectively. Apple and Amazon will wrap up the the last of the so-called FAAMG stock earnings when they report tomorrow. Stay tuned…

Big Tech Pushing S&P 500… But How Does it End? Amazon, Apple, Facebook, Google, Microsoft and Tesla now make up 24% of the S&P 500. It seems like how they go so goes the overall stock market. Keep in mind, “Big Tech” now makes up about 40% of the entire S&P 500. If the trade finds Big Tech to be overvalued or in some type of bubble the market could take a sizable hit as it deflates.