Contrasting outlooks from UPS, FedEx a factor of competition, analysts say
FedEx Corp.'s strength in next-day air deliveries and improvements in its ground business helped it post a more positive outlook for the quarter that includes the holiday shipping season than larger rival UPS Inc., analysts say.
Atlanta-based UPS warned Tuesday that its fourth-quarter earnings would fall short of previous estimates because of higher operating costs and weaker than expected domestic package volume from Christmas to New Year's Day. FedEx, based in Memphis, Tenn., issued a statement saying its business remained strong over the holidays and it would meet its earnings goals.
"They're tough competitors; one may be benefiting at the other's expense," Arthur Hatfield, an analyst with Morgan, Keegan & Company Inc. in Memphis, said Wednesday.
UPS shares fell USD6.12, or 7.4 percent, to close at USD77.18 in trading Wednesday on the New York Stock Exchange. FedEx shares were also down, but the decline was not so sharp _ it lost 94 cents to close at USD94.47 on the NYSE.
Hatfield said it appears there was a shift in the last couple of weeks before Christmas from ground shipments to next-day air deliveries that may have benefited FedEx. A larger percentage of FedEx's overall revenue comes from next-day air deliveries compared to UPS.
While a larger percentage of UPS' overall revenue comes from ground deliveries compared to FedEx, FedEx has been making inroads there as well, said Donald Broughton, an analyst with A.G. Edwards & Sons Inc. in St. Louis.
"I think it's the ongoing success of FedEx ground in stealing market share from UPS ground," Broughton said.
Hatfield said another reason for the contrasting outlooks could also be a matter of timing. He noted that the peak of holiday shipping is in December, which is the beginning of FedEx's third-quarter. December, however, is the end of UPS' fourth-quarter. If there is slowness in the industry during that period, FedEx would be able to make up for it later in its third quarter, while UPS, for its fourth quarter at least, would not be able to do that.
Steve Riepenhoff, vice president of logistics and retailing at Kurt Salmon Associates, a retail consulting company, believes that the popularity of gift cards could have played a factor in a drop-off of UPS' post-holiday business. An increasing number of consumers getting gift cards as holiday gifts means there will be less returning of items. Riepenhoff noted that two of his retail clients have reported a decline in post-holiday returns from a year ago. Both have seen gift card sales increase 10 percent.
In its revised outlook, UPS said that excluding a one-time tax benefit, it expects to report earnings per share of 75 cents to 76 cents for the October-December period. Its previous estimate on that basis was for earnings per share of 83 cents to 87 cents.
Analysts surveyed by Thomson First Call were expecting earnings of 85 cents per share, excluding one-time items. UPS cited a significant drop in U.S. domestic volume during the period from Christmas to New Year's Day and higher operating costs due to the severe weather that struck the midwestern United States during the height of its peak season operations.
Despite fourth quarter 2004 results, UPS reaffirmed its outlook for 2005. The company expects earnings will increase 13 percent to 17 percent in 2005. UPS reports its fourth-quarter and year-end results on Jan. 27.
FedEx, meanwhile, reaffirmed Tuesday its previous third-quarter guidance of 90 cents to USD1 a share. The company said it experienced a strong holiday season and continues to expect favorable U.S. and global economic conditions, with strong demand for all of its transportation services. Analysts surveyed by Thomson First Call expect FedEx to report earnings of 97 cents a share for the quarter ending Feb. 28.
