What Everyone Is Missing About UPS's Recent Earnings Beat

We all know how headlines can be a bit deceiving, but sometimes there's an even bigger story that the article completely misses. And every once in a while, the real story behind the facade presents a tremendous opportunity. 

This week, the headlines have it all wrong again.

CNBC, Reuters, Nasdaq and others all declared that delivery company United Parcel Service (NYSE: UPS) delivered a solid earnings "beat" after its report on April 27. To the casual investor, the headlines made it seem that all was good at UPS. Which is why, amid all the positivity, one Bloomberg article stood out with a less-than-flattering headline:

It was an odd headline, considering the vast majority of coverage seemed positive. Even so, as I would soon uncover, this story only touched lightly on UPS's bigger problems. From there, with deeper research, I found not only declining profits, but deteriorating operating margins for three consecutive quarters -- a very bad thing when shipping volumes are on the rise all around you!

The kicker is that, even though headline EPS showed a beat (due only to a lower-than-expected tax rate), UPS's real operating income actually missed many estimates.

The major issue is that UPS simply just can't get a handle or a profit on all the tiny shipments that are flooding its trucks. Small, light goods ordered through Amazon Prime and other sites that promise cheap shipping rates are overwhelming UPS drivers.

So, ironically, the much-anticipated surge in shipping volume from the rise of ecommerce is actually hurting this carrier. And these trends are likely to continue as we move further into a digital retail landscape.

To make matters worse, UPS is taking some drastic measures in response to its lackluster results -- a few that I believe will end up hurting, not helping, results.

And because competition with FedEx (NYSE: FDX), USPS and mega-shipper Amazon (NASDAQ: AMZN) are only growing, I'd say that UPS isn't in a very good place at all.

Threats of a strike from UPS air maintenance workers union could also trigger a catastrophic event in the coming weeks. At the very least, it might further increase UPS's operating costs as it is forced to spend more on total compensation for the 1,200 employees.

But this is just one of the many issues facing UPS.

The fundamental landscape and some very weak technicals both predict that UPS likely has more pain to come before gaining any real bullish momentum.

Murky Future, Poor Charts 

UPS shares had a very good year in 2016. That January, the stock was trading close to $87 a share, then surged 39% to a high near $121 by December as investors hoped President Trump's policies would generate more business for the shipping giant. 

But when it came time to report results for the Q4 2016, UPS whiffed... big time. The company missed analysts' estimates on the top and bottom lines and actually swung to a net loss of $0.27 a share. 

And the truth is that UPS missed again when you back out the one-time tax benefit. 

FedEx also reported its first surprise earnings decline in four years last week -- I'd say there's a pattern here.

UPS will also be expanding its Saturday activity (which will cost it money in payroll and equipment, even though it isn't actually expanding infrastructure) in another effort to fight off falling margins and competition. It's kind of like hiring more sailors when the fight is in the air. 

What we know now is that the great American resurgence hasn't happened for UPS. Sure, the company is shipping more packages, but it's making less money from it. In fact, UPS lost $570 million in income in its U.S. domestic packages, a 144% decline from the $1.28 billion it made in the same quarter a year before.

And with a forward P/E of 18, I wouldn't exactly call UPS a bargain. 

The charts show just how reluctant bullish investors have been to buy UPS. As major indices continue to make new highs on strong momentum, UPS remains stuck in a rut, unable to break above its upper-channel boundary of $109, let alone the 200-day moving average, which is sitting around the same price.

March brought about a death cross, which is a good indicator of a new, bearish trend.

To refresh your memory, a death cross is a very powerful, bearish technical signal that occurs when the 50-day moving average drops below the 200-day moving average. 

The 200-day moving average then becomes resistance -- a very hard ceiling for a stock to break above. Death crosses typically denote a change in trend that can last for months and can be a useful signal for traders.

If market momentum stops, UPS could very easily break down below support at $103. At the very least, I see shares drifting back down to that level. UPS's odd strategies for success will do nothing to address the changing landscape and rising competition. Until it can effectively handle those issues, I am bearish on Brown.

A 3.6% move down to $103 might not sound like much, but with the trading strategy my subscribers and I use, we don't need shares to to make big moves to generate large gains. By using a simple put option, we can amplify that 3.6% move into a nice 33.3% gain.

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Options Strategies | Amber Hestla | June 27, 2017

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