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Atlanta-based UPS (UPS) reported earnings this morning that were in line with analyst estimates but lowered the company’s full year per share earnings guidance to between the range of $3.50 - $3.70 from $3.90 - $4.20 citing a weak domestic economy and higher fuel costs. Because of its critical role in the distribution of products throughout the domestic and global economy, UPS is considered a bellwether stock regarding the health of the overall economy. The company’s stock has been stuck in a fairly narrow trading range for a couple of years and recently has plunged into bear territory as concerns about a U.S. recession mounted.
 
For the second quarter, UPS earned $837 million or 85 cents, which was the consensus estimate. A year earlier, per share earnings were $1.04. Revenues came in at $13 billion (up 6.7%) while analyst estimates called for $12.8 billion. Better than expected revenue results were somewhat encouraging, but earnings were really hurt by sky-rocketing fuel prices. The rise in fuel prices could have a corollary of increasing consumers’ propensity to shop from home via home shopping networks or more notably the internet. Both these brick and mortar shopping alternatives rely on companies like UPS to deliver their goods.
 
Overall, the company saw a slowdown in both domestic and international package shipments, while supply chain and freight shipments saw increases. Fuel costs rose a whopping 67%. The company’s earnings projections going forward are based on oil priced at $140 a barrel. Oil is currently at $126 and has been falling of late; if this trend continues expect UPS to be a beneficiary.
 
UPS is rated a strong buy by Ockham Research. Based on our metrics, the stock around $60 is selling at a deep discount and should be quite appealing to value investors at current levels, even with today’s modest rally. The stock’s historic price-to-cash flow range is 17.8 – 22.4 and it recently was trading as low as 11.4x. Its price-to-sales historic range is 1.71 – 2.22. The stock recently traded at 1.21x. Were UPS to return to a more rational level based on historic norms, the shares would be trading at $90.