During the internet bubble, logistics stocks were seen as one of the old economy’s bigger winners. Somebody, after all, would have to deliver all those goods ordered online. Compared with most dotcom growth stories, that thesis has shown remarkable staying power until now. Take United Parcel Services, whose shares fell by nearly 16 per cent in early trading on Tuesday, the largest slump since it floated in 1999.
On the face of it, this appears a little harsh. UPS missed second-quarter earnings estimates by about $30m and now expects profits in the third quarter to be about $90m lower than analysts had hoped. Meanwhile, its market capitalisation has shrunk by almost $13bn.
The trouble is that the US package delivery company is still valued at about 1.75 times last year’s sales and almost 18 times 2006 earnings, based on its latest guidance. In absolute terms, that looks punchy given the risk that even online shoppers might turn stingy during a downturn. While demand for its domestic business has held up well, UPS is right so see macroeconomic hazards ahead. Meanwhile, cost pressures, mainly from fuel, are strong. UPS seems to be anticipating another hit to its margins, which raises questions over their longer-term sustainability.
The picture is much clearer though, when comparing UPS with some of its peers in other parts of the world. Deutsche Post, for example, costs just 10.5 times 2006 earnings. While the German postal service faces plenty of risks, its DHL unit is also a competitor to the international package operations of UPS, where profitability has already come under pressure. Hopes for continued strong growth at UPS must, moreover, largely rest on the expectation that the rest of the world will swiftly follow the path of US e-shopaholics. However, even if it does, UPS hardly looks like the smartest way to bet on that happening.