Healthcare Matters

Despite slight sales gains, both UPS and FedEx reported lower earnings than anticipated and revised their 2012 guidance –downward. As a result, UPS shares finished down 3.2% yesterday at $75.42. FedEx shares dropped to $89.26 at the closing bell (down from about $93 a share).

UPS is blaming what it calls “an increasing uncertainty in the United States” (have we heard that before?), as well as the same ongoing themes reported by most companies, such as weakness in Asia exports and the debt crisis in Europe. Of course, FedEx is saying the same and has vowed to make significant cost cuts to counter any drop in package shipments. In fact, both giants intend to pare their express networks in response to a drop in consumer demand for the more premium/expensive shipping services. Apparently, the American consumer, in particular, is opting for slower shipping methods.

Whether it’s a drop in Asian demand, escalating insurance and pension costs, the retiring of aircraft, etc., the accountants, procurement and supply chain departments will work their magic, reorganize where necessary and find the offsets –none of which is good for the general employment picture.

However, given our wishful thinking about the general state of the global economy (it only has one place to go –right?) and the continued growth of e-commerce, both of these stocks still seem like great investments with plenty of headroom. But they also sport extremely high valuations. UPS trades at a forward P/E ratio of close to 17, while FedEx’s forward earnings multiple is more reasonable, but is still nearly 13.

We know that UPS and FedEx dominate –globally. Each year, they make billions while our US Postal Service (USPS) loses billions. What’s interesting here is how the relative financial health of FedEx and UPS –not the USPS–  is being watched and scrutinized now more than ever before, as their general health is regarded as a mirror into the overall health of our economy.

If that’s true, it should be even more interesting to watch what they do/how they respond  –perhaps even instructive?

—Tom Finn