Why Stock Price of UPS is falling in after-hours
If you’ve been wondering why UPS stock has been falling, there are several reasons that might explain why it has been falling in recent days. These reasons include FedEx’s profit warning and the hiring push. However, the real question is the underlying business of UPS. If you think that this company is a good buy, you should pay attention to how Investor sentiment is affecting its stock.
Why Stock Price of UPS is falling in after-hours trading as the company
1. FedEx’s profit warning
The profit warning from FedEx is the latest blow to UPS, which is down 9% in after-hours trading. The company has said it will cut costs by closing FedEx Office locations, curtailing labor hours, and consolidating sorting facilities. The company’s profit shortfall is primarily due to softening demand in Europe and Asia, and it expects the conditions to worsen in the second quarter. The company is also cutting its planned capital expenditures by $500 million and is also deferring new hires.
FedEx’s profit warning comes as a shock to many investors. The company lowered its fiscal second-quarter earnings outlook and completely retracted its guidance for the year. This news sent US markets lower overnight. The S&P 500 dropped 1% overnight, and the decline carried over to Europe and Asia. The German Dax index dropped nearly 2% by midday, and the Nasdaq and Dow fell nearly 1%.
The profit warning was met with a mixed reaction from investors. FedEx cited a combination of macro and service headwinds, but the company also noted a more favorable cost-to-revenue match. While the warning was negative for UPS, analysts said the company is still well-positioned to continue to execute its strategy.
The company’s profits have increased over the past year, but the reversal of that growth has led investors to discount its earnings. It’s a good sign that UPS is doing better than its rivals. However, the company’s results for Q2 have been disappointing, and investors are worried that the company will continue to face similar problems.
FedEx’s profit warning comes as UPS is preparing to report its third-quarter earnings. The company has already warned investors that the global economy is slowing down, which is affecting the business’s margins. Meanwhile, China is still struggling with an ailing property market and COVID curbs. The company’s third-quarter earnings will be released on Oct. 26. Among the most important metrics in this report will be the profit margin of its U.S. domestic package segment.
FedEx’s profit warning will likely make investors nervous, but the company has made other moves to counteract the effects of the profit warning. First, the company is raising its dividend to encourage investors to spend more money and is also reaching out to a major activist shareholder to bring in new directors. These decisions are the first major strategic moves by new CEO Raj Subramaniam. Meanwhile, founder Fred Smith remains on the board as executive chairman.
2. FedEx’s hiring push
A new TOSHA report finds that FedEx failed to protect workers. The company failed to ensure workers were properly trained and protected. While a high-paying job might be attractive, it does not guarantee worker safety. For example, FedEx is not required to post a sign in the workplace noting that workers cannot have cellphones. Instead, workers are required to comply with safety guidelines and policies.
FedEx’s recent data on worker safety shows that risks are increasing. The number of fatalities at its locations has risen from seven to 10 in one year. The rate of time off due to non-fatal traumatic injuries rose 28% in North America between fiscal 2017 and fiscal 2019. The company has increased its safety mentoring program for new employees.
According to the company, it will need to reroute more than 600,000 business packages a day this holiday season. The company is struggling to find enough workers to process these packages and estimates a labor shortage of $450 million for the quarter. The company plans to hire 90,000 new workers in order to cope with the rush. It also plans to hire new trucking routes and third-party transportation companies.
A new UPS patent was granted in 2014 that explains how it can reduce the amount of manual labor at its shipping centers. The company also plans to increase capital expenditures to support its expansion. This is putting additional pressure on earnings and free cash flow. However, despite the new patent application, the company has not yet disclosed how much of these investments will be spent on automation.
The resulting investigation has revealed the fact that FedEx workers are attempting to unionize. These workers are claiming that their benefits are worse than those of UPS. They also claim that management has forced them to attend anti-union meetings. Workers must sign in at these meetings. In addition, FedEx managers lectured them about unions. Several FedEx employees say they are under pressure from the company to meet faster.
In Memphis, Tennessee, one-in-six residents work in the logistics industry. One of the biggest employers in the region is FedEx, which employs 30,000 people, with more than a third working at its World Hub.
3. FedEx’s underlying business
FedEx has been struggling with global trade disputes and the loss of major customer Amazon. The company had a slower-than-usual Thanksgiving holiday this year and the Cyber Week shopping period was pushed into the fourth quarter. It also had to incur costs to expand its Sunday and Saturday ground shipping services. However, the biggest challenge to FedEx is still Amazon, which has reportedly stopped allowing third-party sellers to ship their Prime packages through FedEx.
While FedEx’s underlying business is falling, it remains profitable. The company’s ground-shipping operations took in nine percent more revenue than last year, despite the global economic slowdown. Its express unit, on the other hand, saw lower revenue as Europe’s economy faltered.
The company’s management is doing a number of things to address this problem. It is expanding its network, improving its delivery operations, and hiring new employees in anticipation of future growth. In addition, it is investing in technology such as autonomous vehicles and sensor technologies. It is also positioning itself to take advantage of the e-commerce tailwinds in the United States.
FedEx’s stock is down two-thirds of a percent this year, and is down more than two-thirds of the S&P500 index. The logistics industry is facing a tough year. A decline in the number of packages being delivered is a big part of the problem. The big e-commerce surge is cooling off after the Covid-19 pandemic lockdown. Additionally, a weak U.S. economy and high inflation are also hurting the company’s earnings.
The company is becoming more selective in what it delivers. It is targeting smaller businesses with its e-commerce services, while simultaneously focusing on growing its presence in healthcare. However, the company may not be immune to the weakening consumer spending. In the end, the company will emerge from the recession in better shape than when it entered it.
Although FedEx has been performing well, investors may have lost faith in its guidance for the rest of its fiscal year. However, the company has not provided any definite projections for its fiscal year 2021. This pandemic could persist through the remainder of the company’s fiscal year.
4. Investor sentiment towards UPS
The company’s recent earnings report was largely positive, with the company doubling its dividend and boosting its buyback target. Management also maintained its FY 2022 revenue growth and operating margin guidance and reaffirmed its commitment to improving ROIC and shareholder capital returns. Further, the company has implemented several productivity initiatives, which should benefit UPS stock.
Looking at the company’s future prospects, UPS will need to grow its SMB client base and boost its profitability. To achieve this, the company has introduced new productivity initiatives and set a target of equipping 100 centers with RFID technology. These changes are necessary to improve profitability and generate significant cost savings.
However, the company will have to deal with changes in customer spending, as well as geopolitical tensions overseas. With these challenges in mind, UPS plans to boost dividends and buybacks. The company also increased its quarterly dividend per share from $1.02 in Q4 of 2019 to $1.52 in Q1 2022. Additionally, it has increased its targeted share buybacks to $2 billion, which is double the previous target of $1 billion for this year.
A decline in volumes in the second quarter is a cause for concern. As imports from China continue to increase, the shipping routes could become overcrowded. This, in turn, could make shipping more expensive for UPS. However, the company has begun preparing contingency plans to meet demand.