If A Drop In Demand Is Real, Why Is UPS Handling It So Much Better Than FedEx? - United Parcel Service (NYSE:UPS), FedEx (NYSE:FDX)

After FedEx FDX released its earnings for the fiscal first quarter last month, investors began to pay close attention to the transportation giant’s performance as a possible gauge for the state of the general economy.

Several analysts cut the company’s price target as management blamed a drop in shipping volumes for the company’s weaker-than-expected results, with earnings of $3.44 per share on revenues of $23.2 billion.

“We sense that we may be in the initial stages of a cyclical downturn, and we have limited confidence in the near-term earnings outlook,” said analyst Fadi Chamoun.

Management did not clarify specific reasons for the drop in demand for FedEx’s products, but detailed plans for cutting costs.

One reasonable conclusion from FedEx Express’ 11% year-over-year reduction in global package and freight volume is that a recession is upon us. Such a drop in shipping volumes could be a consequence of a general drop in consumption and production.

The 11% drop caused FedEx Express, the company’s fast shipping service, to see an operating income decline of 69%.

Also Read: Major Apple Supplier Goes Into Closed-Loop Production Due To COVID Resurgence In China: Will It Impact Q4 iPhone Shipments?

The Drop In Demand Is Real, But UPS Is Handling It Better

Yet, investors had to wait more than a month to gather more evidence to either support or dismiss this theory.

Last week, United Parcel Service Inc. UPS, FedEx’s largest competitor, released earnings for the third quarter.

The company beat estimated earnings by 4.18%, at $2.99 versus an estimate of $2.87.

The markets received the results benevolently, with stocks trading higher on the date of the release.

Revenue was up $977 million from the same period last year at $24.2 billion, a 4.2% increase.

Results were so solid that UPS reaffirmed its full-year revenue guidance of approximately $102 billion. 

Overall shipping volume was down 2.1% for UPS quarter-over-quarter. However, the company was able to achieve revenue per piece shipped to rise by 8.6% from the previous quarter.

The company’s drop in demand was significant, but not as steep as FedEx’s.

“We have not seen any demand destruction at this point,” CEO Carol Tomé said.

However, UPS is bracing itself for the uncertainty facing the global economy by doubling down on productivity.

The company is introducing new technology tools such as “smart” package tracking that have reduced the number of misplaced packages by more than half.

FedEx is also executing strategies to become more productive, although the company’s approach focuses on cost-cutting initiatives, including the closure of over 90 FedEx Office locations and putting off new hires.

Other measures include a reduction in flight frequencies and temporarily parking aircrafts, volume-related reductions in labor hours, consolidation of some operations and reduction of Sunday operations at a number of FedEx Ground locations.

The company is also looking to identify five corporate office facilities that could be shut down.

Benzinga’s Take: The drop in demand is palpable across the globe. Earlier this month, ocean carriers canceled dozens of sailings due to weak demand, as reported by The Wall Street Journal.

While both UPS and FedEx experienced drops in volume, UPS is navigating these hardships better.

Both companies are compensating by rising shipping costs by an average of about 7%

The markets are responding to these situations accordingly. While FedEx’s stock price is down by almost 20% in the past six months, UPS is down only 7%, only one and a half percentage points below the S&P 500.

FDX closed at $160.37 on Friday, gaining 5.37% from the previous week.

UPS finished last week at $167.17, up only 0.7% for the week.

Pictures by Liam Kevan and Ty Lee on Unsplash.

Image and article originally from www.benzinga.com. Read the original article here.