What brown didn't do for investors.
United Parcel Service Inc. (UPS - Get Report) fell on Thursday, Sept. 13, after its transformation plan, which is expected to result in $1 billion of cost savings and increase adjusted earnings per share in the range of $1 to $1.20 by 2022, was relatively in-line with analysts' expectations, dampening investor sentiment.
The Atlanta-based package delivery company outlined its four strategic imperatives: Expansion of high-growth international markets, growing business-to-business and business-to-consumer e-commerce, further penetration of the healthcare and life sciences logistics market, and enhancing services for small- and medium-sized businesses. The plan also includes more than 70 expansion projects for package facilities and the opening of seven new "super hub" automated sortation facilities that will be a 30% to 35% increase in efficiency than comparable less-automated facilities.
UPS expects charges of $550 million to $750 million for the transformation plan.
With these initiatives, UPS will add 350,000 to 400,000 pieces per hour of sortation capacity in the U.S. in 2018, 2019 and 2020, "which is about seven times the additional sortation capacity added in 2017, alone," the company said. The U.S. domestic segment will receive about two-thirds of the benefits of the transformation program.
That said, the company is also working to expand its international capacity, as it anticipates global package market growth in the range of $300 billion to $480 billion by 2022, and is focused on growing in Asia, Europe and emerging markets. As UPS looks to expand to these markets, Chief Executive Officer David Abney said that there are some "places where it makes more sense to form joint ventures ... and then there are smaller places where it just makes more sense to do agent-relationships than have a company presence."
Given the current trade rhetoric, such as the U.S.-China trade tensions and the North American Free Trade Agreement negotiations, Abney said the company advocates with governments throughout the world about trade policies.
"We certainly agree that trade needs to be balanced and needs to be fair, but we also think that the globalization in trade really improves society as a whole," Abney said.
"The government is going to set trade policy, we can advocate and certainly try to influence, but then the flexibility of our network is what we need to focus on, how we can adjust our network to stay in touch with the trade policies and the rules," Abney added.
The CEO said he worries about tariffs and counter-tariffs, but "when you can't shape the [trade] rules, [we] use our technology and flexibility to operate within those rules."
UPS Chief Transformation Officer Scott Price acknowledged global e-commerce as a "megatrend" and sees "tremendous opportunity" in the area. Chief Market Officer Kevin Warren detailed the global trends and is expecting a 28% increase in cross-border e-commerce over the next three years, with the anticipation that business-to-business e-commerce sales will reach $1.2 trillion by 2021.
"We are implementing changes that strengthen the ongoing core earnings power of the company," Abney said. "The savings we achieve will be reinvested in the company and its people, and will be used to reward shareowners."
Shares of UPS fell 2.9% to $119.69 on Thursday.
Morgan Stanley had anticipated a downside move in the stock following the conference.
"A base case outcome of a $1 billion in higher earnings in three years is estimated to be worth roughly 10% to the stock today," Morgan Stanley analyst Ravi Shanker wrote in a Sept. 6 research note. "Given the high expectations built into the stock together with the lack of long-term guidance, we believe the stock could trade off about 2% in this scenario."
Morgan Stanley has an underweight rating on the stock with a $92 price target.
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