UPS Lowers Earnings Estimate, Sending Stock to Five-Year Low

This story appears in the June 30 print edition of Transport Topics.

UPS Inc. lowered guidance on its second-quarter earnings by about 15%, less than one week after FedEx Corp. posted its first quarterly loss since 1997, demonstrating that even the two largest corporations in North American freight transportation, with the most far-reaching global footprints, are ultimately not immune to the continuing struggles of the all-but-stagnant U.S economy.

UPS’ stock price fell to its lowest level since early 2003, after the Atlanta-based company said June 23 that “unprecedented” fuel increases and an “anemic” domestic economy would put earnings per share in a range of 83 cents to 88 cents for the three months ending June 30. The company’s original per-share guidance was 97 cents to $1.04.

FedEx said June 18 that it lost $241 million for the three months ended May 31 (6-23, p. 3), but largely related to a one-time charge at its chain of retail stores, formerly known as FedEx Kinko’s. Even eliminating one-time effects, though, FedEx’s earnings per share from consistent operations declined to $1.45 from $1.90 the year before.

In recent quarterly reports, both parcel giants had said their international operations were keeping them flush and that they were cushioned by the parcel-delivery industry’s historic growth record, which usually was a bit ahead of gross domestic product.

The UPS statement cited a shift in shipping habits as contributing to the difficulties: “an accelerating contraction in the use of premium air products.” That shift means customers are moving from express delivery to next-day air, or from deferred air to all-ground delivery.

Confronted with steep fuel surcharges that have mirrored soaring diesel and jet fuel prices, shippers have reacted with cost-cutting actions.

“We are very, very price-conscious now,” said Eric Morley, director of logistics for Best Buy Co. and president of shippers’ group NASSTRAC.

Though “just-in-time” delivery was considered the answer to heavy inventory costs earlier this decade, Morley said in an interview that he and his fellow shippers also are considering fuel costs and environmental concerns.

“No one is saying, ‘Go take longer,’ but we’re trying to optimize things, especially with one- and two-day ground lanes,” said Morley, who added that many of his budget-conscious customers are choosing transportation options based on price. He said Best Buy’s Web site lets consumers pick between expedited and ground delivery, or cheaper still, store pickup.

“That segment is growing,” he said. The economy at large, though, is showing little of that growth.

Inflation-adjusted, second-quarter growth in U.S. gross domestic product should come in around 0.2% per year, Bob Costello, chief economist of American Trucking Associations, estimated. On June 26, the Commerce Department issued its final figure for first-quarter GDP at 1% a year, up from an earlier estimate of 0.9%.

Fourth-quarter growth from 2007 was 0.6%.

In a June 25 statement on interest rates and the economy, Federal Reserve System officials said, “Labor markets have softened further, and financial markets remain under considerable stress.

“Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters,” they said in announcing they would keep a key target for short-term rates at 2%.

Stock analyst Jon Langenfeld, who follows both parcel carriers for Robert W. Baird & Co., said the big question is whether the shift in transportation desires becomes perma-nent, or will it be a temporary phenomenon?

“It could be a permanent shift if fuel remains at current levels,” Langenfeld told Bloomberg News.

The UPS change in earnings guidance represents a decline of 14.9%, as measured to the midpoint of the new range, 85.5 cents per share, from the midpoint of the old range, $1.005.

The company’s stock price fell from a close of $66.26 on June 23 — just before the announcement — to $62.26 the following day. The decline continued into the week, closing at $59.88 on June 26. The last time UPS shares were that low was in 2003, when they dropped as low as $53.18 in March of that year.

For the five weeks that ended June 23, the Energy Department’s national retail average for diesel has flattened out around $4.69, on average. During the same time in 2007, diesel fuel averaged $2.81 a gallon, making for an increase of 67%.