Most investors in United Parcel Service will be hoping for a successful holiday season after having been disappointed in the past two years. However, the company's long-term financial targets also deserve scrutiny. In a nutshell, UPS is falling behind its five-year targets and has some catching up to do. Will it be forced to reduce its financial targets, and does it really matter?
Management outlined its long-term financial targets at its investor conference in November 2014, and despite falling behind them in 2015, management hasn't adjusted them since. In fact, its 2016-2019 targets remain the same as its previously announced 2015-2019 targets. The following table shows how 2015 guidance has been downgraded since last year and how it lags long-term guidance. Furthermore, it applies to every single metric.
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SOURCE: UNITED PARCEL SERVICE PRESENTATIONS. *AT CONSTANT CURRENCY.
Can UPS really hit its long-term targets, and should they be be reduced in the future? Moreover, has its key rival, FedEx Corporation , had similar problems?
To help answer the question, let's look at four factors affecting UPS revenue and earnings in 2015:
- Increased pension expenses
- Adverse foreign currency movements
- Falling jet fuel prices that have reduced the fuel surcharge UPS charges customers
- A weakening global economy
The first two issues were disclosed in January, when UPS preannounced its disappointing fourth-quarter 2014 results. Referring to 2015, the press release mentioned that "increased pension expense of approximately $180 million due to lower discount rates, and currency headwinds of more than $50 million[,] will negatively impact results. The company now anticipates 2015 diluted earnings-per-share growth to be slightly less than its long-term target of 9% to 13%."
To be fair to UPS, the latest guidance is for EPS at the high end of the 6% to 12% range quoted in the table -- in other words, the company looks set to do well relative to its revised guidance in January.
Moreover, currency effects and lower fuel surcharges have had a large effect on UPS' results. For example, in the third quarter they reduced top-line revenue growth by $700 million. Adding back to the reported revenue of $14.24 billion would result in revenue growth of 4.5% rather than the 0.4% reported decline. Moreover,lower fuel surcharges have negatively affected revenue per package in 2015.
Rival FedEx has also faced significant issues with currency and fuel in 2015, with its Express segment revenue declining 6% in its recent first quarter of fiscal 2016 as "lower fuel surcharges and unfavorable currency exchange rates more than offset improved base rates." This isn't just a UPS issue.
The final issue is more problematic, and FedEx and UPS have both referred to a weakening global economy in recent quarters. FedEx began the calendar year predicting U.S. GDP to grow 3.1% in 2015, with world GDP up 3% and industrial production up 3.9%. Fast-forward to its current forecast, and estimates have been reduced across the board. FedEx now expects U.S. GDP and world GDP growth of just 2.4% in 2015 and industrial production growth of only 1.5%. Moreover, FedEx expects world GDP growth of 2.8% in 2016, a rate that most commentators wouldn't have predicted a year ago.
Fuel surcharges and foreign currency movements are unpredictable, and while they hurt UPS in 2015, they could easily turn into tailwinds in future years. As a consequence, it's difficult to argue that UPS should take down its estimates. Moreover, recent results from FedEx suggest it's possible to maintain guidance even with slowing economic growth.
However, slower global growth is more of a concern. If UPS does reduce its long-term estimates, it will probably be due to lower economic growth expectations. That's never a good thing, but it is something the market has probably already priced in. In other words, don't panic if UPS' guidance for 2016 and beyond is lower than its current long-term expectations.
The article Can United Parcel Service Meet Its Long-Term Performance Targets? originally appeared on Fool.com.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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