UPS lags in robust trucking market
Earnings season is in full swing, covering railroads, OEMs, and major transport entities, prompting a detailed analysis from Chris Frusciante, portfolio manager at TheStreet Pro and CIO at Tematica. UPS has found itself in a difficult position following its recent report, which resulted in a stock sell-off driven largely by guidance concerns. The company is facing significant pressure from the competitive setting, specifically from Amazon. The retail giant’s expansion into business freight and delivery through its announced Flex program has raised substantial questions about UPS’s future market share. Adding to the complexity, UPS did not guide for a stronger back half of the year in its domestic business. This is perplexing given the context of a resilient consumer, the approaching holiday shopping season, and generally robust demand for freight, creating a puzzle for investors trying to reconcile market conditions with the company’s outlook.
The situation at UPS is further complicated by its status as a restructuring story, particularly in a post-Amazon environment. Stakeholders are still waiting for a payoff that appears to be taking longer than expected, with competitive challenges potentially delaying progress even further. During the earnings discussion, UPS attempted to manage sentiment by arguing that if one ignores Amazon and the volume they intentionally made available to the market, they actually grew volume in the second quarter. However, this “damage control” was undermined by a notably weak third-quarter outlook. While the company referred to underlying strength, Wall Street focuses on the overall numbers. The attempt to explain away performance by stripping out various factors was compared to putting “lipstick on a pig,” failing to reassure investors who were expecting robust guidance to match the broader market’s strength.
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Despite the struggles at UPS, the broader freight market appears healthy according to channel checks. The transportation and trucking sectors have been among the best-performing areas recently, a stark contrast to historical trends. Old Dominion, for example, reported an operating ratio (OR) of 70, signaling strong efficiency, though even strong performers can see stock volatility if they fall short of whisper expectations. The strength in the market is also evident in the rail sector and tight capacity utilization for truck fleets. This tight capacity is a key factor driving the current cycle, with Derek Leathers, CEO of Werner Enterprises, describing the industry as being in the “third inning.” He noted that the difficulty in finding qualified drivers is capping capacity growth, a dynamic that keeps the market favorable for carriers who can secure the necessary labor.
