Earnings Preview: Economy weighs on UPS profits

UPS Inc. reports second-quarter earnings on Tuesday 22nd July. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Slowing U.S. economic growth and high fuel costs are expected to put a damper on United Parcel Service’s results for the April-June quarter.

There should not be too many surprises, since the Atlanta-based company lowered its earnings expectations for the quarter on June 23.

UPS predicted earnings per share for the second quarter, which ended June 30, would be within a range of 83 cents to 88 cents, compared with the 97 cents to USD 1.04 the company originally anticipated.

UPS is able to pass higher fuel costs on to customers in the form of a fuel surcharge on shipments. However, the surcharge increases have not kept pace with rapidly rising fuel prices. Meanwhile, UPS’ business has suffered amid the economic downturn in the U.S. The result has been lower-than-expected domestic package volume and customers making less use of premium air products.

UPS last month did not say what impact its lower expectations for the second quarter might have on its full-year results. But analysts have lowered their projections for UPS’ full-year results.

BY THE NUMBERS: Analysts surveyed by Thomson Financial, on average, expect UPS to post earnings of 85 cents a share for the second quarter. They predict revenue for the three-month period will come in at USD 12.81 billion.

ANALYST TAKE: Wachovia Capital Markets analyst Justin Yagerman said in a research note last week that the U.S. economy will continue to be shaky for the rest of 2008, which will likely affect UPS’ results.

“We believe any improvement in consumer demand and/or freight levels felt in June will likely prove to be misleading as short-term catalysts likely were more at play, i.e. refund checks and flood-related freight diversion, and we fear that inventories remain plentiful per recent ISM readings,” Yagerman wrote.

He also said that UPS’ international results going forward could be affected by slowing economic growth in Europe. Long-term, however, he said he remains bullish about UPS’ overall business prospects.

WHAT’S AHEAD: UPS is working out a contract to carry some air packages for DHL, the struggling U.S.-based express shipping unit of German postal service Deutsche Post AG. UPS, when it announced the proposed collaboration on May 28, predicted that the deal, when completed, will add up to USD 1 billion in annual revenue for the company. The agreement is expected to last up to 10 years and covers express, deferred and certain international packages, but not freight. UPS also will transport DHL air packages between the U.S., Canada and Mexico. The deal could be a significant blow to DHL’s current vendors for the air shipments UPS is seeking to take over. Thousands of jobs could be lost in Ohio, where some officials are trying to scuttle the deal.

STOCK PERFORMANCE: UPS shares fell about 16 percent during the quarter. Shares fell USD 1.35, or 2.2 percent, to close at USD 59.46 on Monday. The stock’s 52-week range is USD 56.10 to USD 78.99.