UPS & FedEx eye overseas growth
With the U.S. economy waning and its outlook for recovery uncertain, the shipping industry, too, is eyeing overseas growth opportunities to offset tough times at home.
But while bellwethers like UPS Inc. and FedEx Corp. seek to reduce their dependency on the wobbly domestic economy, they still cannot afford to stop focusing on their core U.S. operations, analysts say.
‘I don’t know whether this recession will be over tomorrow or last two years, but I do know basing long-term growth strategies on near-term difficulties is not a winning strategy,’ Edward Jones analyst Dan Ortwerth said Wednesday.
UPS, the world’s largest shipping carrier, cut its first-quarter earnings forecast Tuesday because of higher fuel costs, a weakening U.S. economy and reduced domestic package volume.
It did not update its guidance for the full year, but that did not stop several analysts from lowering their expectations for UPS earnings for 2008 and beyond.
Last month, Memphis, Tenn.-based FedEx reported a 6 percent drop in third-quarter earnings and said a slow economy and high fuel prices are expected to continue cutting into profits. It predicted fourth-quarter earnings would be lower than a year ago and its earnings growth would be limited in the next fiscal year.
UPS’ chief executive, Scott Davis, said at an investor conference last month that his company can’t rely on U.S. package volume growth alone.
The company said that by 2010, it intends to increase to 40 percent the percentage of its operating income that comes from its international and supply chain/freight operations. That compares to 32 percent last year.
In turn, it intends to reduce from 68 percent to 60 percent the percentage of its operating income that comes from U.S. domestic operations. UPS is eyeing China, India and Europe for growth opportunities.
FedEx, meanwhile, said last month that it is depending heavily on its ongoing growth overseas. Sales at the company’s cargo airline saw double-digit growth recently primarily because of growth in international express shipments.
Currently, about 39 percent of FedEx annual revenue comes from the company’s domestic express business. About 25 percent comes from its international express business. The company hasn’t publicly released future projections for how much revenue will come from domestic versus international operations.
But analysts who follow UPS and FedEx said the shippers will still need to rely on their home market in years to come.
‘Despite UPS’ efforts in the last several years to focus away from the maturing U.S. market, announcement shows how dependent the company’s business is on the U.S. economy,’ Citigroup analyst John Kartsonas said in a research note Wednesday.
He added, ‘Without some kind of improvement in industrial production, we don’t foresee any considerable progress in business performance and/or margins, while at the same time high fuel prices remain a headwind to growth.’
