UPS sees higher profits in slow-growing economy

Tue Oct 25, 2011 7:32pm EDT

UPS employees load containers onto an aircraft at the World Port air hub during a visit by U.S. Treasury Secretary Timothy Geithner in Louisville, Kentucky September 26, 2011.   REUTERS/John Sommers II

UPS employees load containers onto an aircraft at the World Port air hub during a visit by U.S. Treasury Secretary Timothy Geithner in Louisville, Kentucky September 26, 2011.

Credit: Reuters/John Sommers II

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(Reuters) - United Parcel Service (UPS.N) reported a higher quarterly profit as increased pricing, cost cutting and technology improvements helped compensate for domestic shipping volume dulled by a sluggish economy, and it affirmed its outlook for record 2011 results.

The company's shares slid more than 2 percent in midday trading, giving back some of a more than 15 percent rally from this month's lows, with the pace of consumer holiday demand still in question.

The U.S. economy appears to have stabilized and is growing slowly, after concern about a possible double-dip recession stifled consumer demand earlier this year, UPS said.

U.S. consumer confidence sank to a 2-1/2-year low in October on worries about jobs and income.

"Their tone was clearly more positive than it was last quarter, but ... there's still some uncertainty," said analyst Kevin Sterling of BB&T Capital Markets in Richmond, Virginia.

"Given the run in the stock price in October, there's probably some profit-taking today," he said. "They didn't come out and say, hey, things are great and we're raising our guidance. They said things are OK, we're UPS and we're weathering the storm."

The company is well-positioned to handle a run-up in volume from customers with lean inventories ahead of the peak holiday season, analysts agree.

The final two weeks before Christmas could have a "meaningful" effect on fourth-quarter results if consumer demand picks up and retailers low on inventory need fast shipment of goods, Chief Executive Officer Scott Davis told analysts on a conference call.

"Over the last month or so, we are starting to see better economic numbers, so there is more optimism out there, and that could turn things around," Davis said. "We are still expecting a slow-growth economy, but I don't think it is as negative as people were thinking two and three months ago."

The company's shares were down 1.7 percent at $69.66 in midday trading on the New York Stock Exchange, while the Dow Jones Transportation average .DJT fell 1.8 percent.

(For a graphic on UPS earnings, click link.reuters.com/qup64s )

UPS has forecast record earnings per share of $4.15 to $4.40 this year as it cut costs and raised shipping rates in the face of a slowly expanding global economy.

UPS and FedEx Corp (FDX.N) are considered economic bellwethers because of the volume of packages they handle.

The value of packages handled by UPS's trucks and planes each year is equivalent to about 6 percent of U.S. gross domestic product and 2 percent of global GDP.

NAIL-BITER

Domestic shipping volume averaged 12.74 million packages a day, little changed from 12.73 million a year ago. Operating margins improved on higher yields, or revenue per package, as well as on more efficient networks, the company said.

Core pricing, excluding fuel surcharge, rose by an average of 3 percent domestically in the quarter, UPS said.

"Domestic margins coming in better than expected, especially given further uncertainty in terms of volumes, underscores the investment opportunity here," said Peter Nesvold, Jefferies & Co. analyst.

If the company can keep raising prices around this pace, "that little bit of pricing goes a long way in terms of earnings over the next several years," he added.

Most transport companies have been reporting freight volume at or slightly above very low expectations, analysts said.

Holiday shipping season is "more of a nail-biter than it used to be," UPS's Chief Financial Officer Kurt Kuehn said in an interview.

Many consumers now wait until the final days to order online, making it harder for the company to gauge aircraft and other transport needs.

E-commerce accounts for more than one-third of UPS's total domestic shipments. FedEx on Monday forecast record holiday shipments, due mainly to online shopping, and said it plans to add 20,000 seasonal workers to help handle the extra volume.

In September, FedEx cut its full-year profit forecast and called for ongoing sluggish economic growth.

Responding to slow exports from Asia to the United States, UPS said it had cut capacity there by 10 percent. But it expects volume to pick up in the fourth quarter, boosted by shipments of new technology product launches.

International shipping volume averaged 2.34 million a day, up from 2.24 million.

"Asia reflected kind of the chaos we felt we were in during August in the U.S.," Kuehn said. "Given the absolute stalemate in D.C., the concerns about perhaps a double dip, it really did slow down demand. Our aircraft reflected that coming out of Asia."

UPS has also been pushing for trade agreements that it says will open the way for more exports.

Davis, who is on U.S. President Barack Obama's Export Council, has said that one UPS job is created for every 22 packages that cross international borders.

On October 21, Obama signed free trade deals with South Korea, Panama and Colombia that are estimated to boost exports by around $13 billion annually.

The world's largest package delivery company said third-quarter net income rose to $1.04 billion, or $1.06 per share, from $991 million, or 99 cents a share, a year earlier.

Analysts on average were expecting $1.05 per share, according to Thomson Reuters I/B/E/S.

Revenue rose 18 percent to $13.17 billion, matching the analysts' average forecast.

(Reporting by Lynn Adler in New York; Editing by Lisa Von Ahn and Gunna Dickson)

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