United Parcel Service on Thursday reported better-than-expected fourth-quarter earnings but its shares fell more than 6% amid concerns about the costs of upgrading its delivery network.
The world’s largest package delivery company posted adjusted earnings of $1.67 per share as revenue rose 11.2% to $18.83 billion. Analysts had expected earnings of $1.66 per share on revenue of $18.19 billion.
The revenue surge was led by double-digit growth in UPS’ freight and third-party logistics businesses. The company also booked a $258 million, or 30 cents per share, benefit from the tax law.
But UPS’ share price dropped 6.1% to $119.51 in trading Thursday after its 2018 earnings forecast missed analysts estimates and the company said it would spend at least $6.5 billion this year improving its delivery network.
UPS and rival FedEx “have already spent billions of dollars upgrading their networks to handle surging e-commerce package volumes, weighing on margins and leaving investors frustrated over the expense,” Reuters said.
During the fourth quarter, UPS spent $1.5 billion on capital and some $60 million on installing new technology and automated capacity to handle peak-period volumes. Despite those investments, some deliveries were delayed after a surge in holiday online shopping orders overwhelmed the system, leading to $125 million in additional operating costs.
According to Stephens analyst Jack Atkins, the company is betting that if it can handle more volume it can increase the number of packages it delivers to households, and eventually improve margins and profitability, as opposed to pushing for higher prices and less volume.
“We are going to have significantly different capacity [by peak season 2018],” CEO David Abney told Reuters.
The extra capacity will include the addition of 14 Boeing 747-8 cargo jets and four Boeing 767s for UPS’ fleet. But for 2018, UPS forecast adjusted earnings per share of between $7.03 to $7.37, compared to analysts’ expectations of $7.16 per share.
“Our momentum, transformative actions and the economic catalyst from the Tax Cuts and Jobs Act position UPS for growth in 2018 and beyond,” Abney said in a news release.