United Parcel Service and the Ten Billion Dollar Economist
United Parcel Service missed earnings expectations yesterday. The stock declined by about 15% over two days, losing about $10 billion of market cap. It was not so much the current earnings miss that bothered analysts, but the reduced expectations and lower forward guidance.
The conference call was handled by CFO Scott Davis who is a twenty-year veteran with the company. He has outstanding accounting and management credentials, and has held a number of important positions in corporate finance.
Here is what the market saw:
- There is a pre-disposition since Bernanke’s May comments to expect a recession. Most cyclical stocks declined by 20% or more in that period.
- Any anecdotal evidence becomes support for this idea, stimulating selling by the 14,000 hedge fund managers, most of whom are (according to Doug Kass, who should know) inexperienced. Many have a method of always trying to guess the next market tick and get there first.
- The UPS report got great play because Davis saw a "moderating economy" in the second half of the year.
- The decline in the transportation stocks got a lot of play on CNBC and other sources. Bob O’Brien was on repeatedly explaining how declines in the transports may lead the economy.
- After a short time "everyone knows" that UPS was signalling a weak economy.
The result is that the UPS report and conference call cost the other transport stocks multiples of the $10 billion. (Full disclosure — I don’t hold UPS, but my partnerships have some calls in other transports).
I doubt that many of those doing the selling bothered to listen to the conference call or get the transcript, but I did. Take a look at Davis’s comments, paying particular attention to the implications for the economy or other transportation stocks.
"Jordan Alliger – Deutsche Bank – Analyst
Just a real quick follow-up. I know you mentioned moderation in economic growth in the second half. I’m just curious — what are your economists looking at? Can you pin a specific GDP type of number?
Scott Davis – United Parcel Service – CFO
I guess I’m the economist. I think that we’re generally going with consensus. We’re a very good real-time indicator of the economy. We’re not a good leading indicator. [emphasis added] But I think that the consensus as far as growth right now is probably slightly below trend going forward, 3% or a little bit below that. As I said, Jordan, I think you can translate our volume growth is a little bit higher than that because the small package market is growing faster than U.S. economy. And we’ll certainly as we have done
in the past at least keep market share in that market."
There were many other similar statements about what was meant by "moderating" but the point is obvious. Scott Davis’s chair offers no particular insight into the future of the economy, since the business data he sees do not provide a leading indication. He is a smart guy reading the Wall Street Journal and looking at the Blue Chip Roundtable projections like the rest of us. He is not an economist or a forecaster. His description of their current business was solid, and he made some rather obvious comments that everyone already knows — that the rapid growth of the first half of the year will not and should not be maintained.
So how many times will the market "bake this in?"