Not surprisingly, FDX just reported a tough Q3. Despite revenues climbing a healthy 4%, earnings decidedly missed expectations. Excluding special items, EPS was $1.23 vs. the $1.39 analyst average. The reasons expressed were customers selecting less lucrative shipping modes and international revenue coming in $100M less than expected. I think the real problem FDX is going to have is the going forward expectations. They are already slashing their FY 2013 EPS from $6.60 to between $6 and $6.20. As I had posted earlier, it would appear that the real problem facing FDX is having to adjust downwards their 2014 projections. As it stands, analysts are looking at a nearly 29% INCREASE in EPS which is decidedly against the recent trend. So, despite the $1.7B restructuring, cutting back some airlift capacity and whatever other steps are to be taken, it would seem pretty clear that expectations for next year will cut way back. As a result, the forward P/E will rise considerably from 12.86 to 14 or so. Meanwhile, if UPS avoids its own ooops! moment next month, the forward P/E will be not far from FDX's. Our earnings expectations are for $5.01 this year and $5.72 next year. In the last 4 quarters, we missed EPS expectations by a total of $.10. So if we lower our FY 2014 by a dime, we get to $5.62 or a P/E of around 15. Under the presumption that FDX lowers their FY 2014 EPS by a reasonable $.50 to $7.36, their forward P/E comes in at 13.9.
So the whole thing is what will UPS report next month? If we meet expectations it would be a terrific accomplishment due to tough international revenue conditions and a nasty weather scenario. But by holding serve, our 6X dividend advantage and close forward P/E comparison to FDX should make investors look up and take notice.
BTW, it is a bit surprising the market isn't punishing UPS a bit more. Clearly, being the other bell weather in the industry should suggest that we'll be facing some of the same pressures that caused the giant FDX miss. If however, our management group was able to perform well under similar conditions (meet our conservative expectations) and keep margins at present levels, we could actually replace FDX as the darling of the sector. Wouldn't that be a refreshing change?