Not all earnings misses are created equal. Last night, the controversial maker and distributor of nutritional supplements Herbalife (HLF) reported profits of $1.55 per share versus analysts’ consensus estimates of $1.57, and this morning UPS (UPS) unveiled EPS of $1.21 ex-items compared to expectations of $1.25. On the surface, these are similarly disappointing results and, indeed, both companies’ stock is trading lower this morning, but digging just a little deeper into the reports and prospects for the two companies leaves me with very different views on their prospects, and shows the danger of looking only at headline numbers.
Let’s take them one at a time. I have had my say on the Herbalife saga before. My attitude to the long running story of them and Bill Ackman’s short play can best be described in the words of Mercutio in Romeo and Juliet, “A plague a’ both your houses.”
Ackman’s campaign for Federal investigation of the company and his increasingly weak “blockbuster presentations” detailing the shortcomings of Herbalife look, to the impartial observer, like the actions of a desperate man. His dislike of the company and their business model would be listened to more closely by many, me included, if he hadn’t already taken a massive short position in the stock before voicing them. As it is, his ever more desperate attacks are easily seen as just another trader with a losing position talking his book.
That is not to say that Herbalife is a shining example of how a corporation should operate. To me, any business that involves you as an “employee” paying money to your “employer” from the outset is questionable. That a business relies in part on greed and stupidity for revenue is nothing new; many would claim that the gambling and tobacco industries, for example, have done that for years. However, when those enriching the business believe they are working for that business, it seems particularly distasteful to me. Neither the fact that some make money from Herbalife, nor that those being exploited enter into the deal willingly, alter my view. It may make the scheme legal, but it doesn’t make it laudable.
Nor, more relevantly, does it make such a company a good investment in the long term. Rarely do people do anything these days without checking online first, and a simple Google (GOOG) search of the company leads to countless results claiming that what they do is a scam. Incidentally that same Google search also results in the box on the side that Google’s algorithms now generate informing you that Herbalife is headquartered in the Cayman Islands, and the two most popular related searches are “Amway” and “Pyramid scheme.” Neither of these things is bad per se, but they are likely to be enough to deter many people who might otherwise have believed that Herbalife was their passport to wealth.
The recent numbers would suggest that all of the bad publicity is beginning to have an effect. After 21 straight quarters of earnings beats, Herbalife missed on earnings and revenue and lowered full year guidance. Now, this quarter could be just a blip, or the result of Wall Street’s estimates catching up with reality, but the lower than expected revenue and reduced guidance have the distinct feel of chickens coming home to roost. The stock is down 12 percent from yesterday’s close as I write, so it would seem that the market agrees.
UPS also missed on the bottom line as I said, and lowered full year guidance from $5.05-$5.30 to $4.90-$5.00. Their stock also moved lower on the report and is off nearly 3 percent in early trading. By contrast, though, when you look at this report in full, this looks like a buying opportunity. Revenues were actually a little higher than expected at $14.26 billion versus a $14.11 billion consensus estimate, and came on increased package volume.
What hurt the bottom line and full year forecast was increased spending by the company. CFO Kurt Kuehn said that UPS were “making investments in new capabilities and network capacity to ensure we meet customer expectations," that would “...provide financial benefits for years to come.” The package delivery business is growing apace as internet retailing becomes increasingly mainstream, so a short term hit to profits to increase long term capacity seems like a smart move to me and a reason to buy, not sell, the stock.
Looking at just the unadjusted EPS of a company without context can lead to mistakes as well as being misleading. This Reuters report, for example, here repeated by CNBC, compares the $0.49 EPS that UPS reported after an expected $665 million charge for pension liabilities to the estimates of $1.25, which were, of course, ex-items. If one of the world’s most respected news agencies can make such a basic error it should serve as a warning; don’t react to the headline number only. Even if a company misses estimates it isn’t necessarily a bad sign. As the differing stories of Herbalife and UPS demonstrate, there are good and bad earnings misses.