UPS profit tops forecasts, sees 2012 growth

United Parcel Service cargo aircraft are loaded with air containers full of packages bound for their final destination at the UPS Worldport All Points International Hub during the peak delivery day in Louisville, Kentucky, December 22, 2011.

(Reuters) - United Parcel Service (UPS.N) posted a stronger-than-expected quarterly profit and forecast 9 percent to 15 percent growth this year as solid U.S. demand and growing e-commerce shipments offset an uneven global economy.

The flood of shopping on-line and by using a mobile device will keep shipping demand elevated this year at UPS, which has adapted technology to cut costs and curbed capacity in regions where trade flows are slower, analysts said.

Share prices fell on profit-taking, and the company said it remained "guarded" about Asia exports to the United States, while expecting "euro headwinds" to challenge first-quarter results.

UPS shares have risen 6.5 percent over the last three months, about triple the advance in the S&P 500 index.

The world's largest package delivery company on Tuesday reported its fourth-quarter profit down sharply as the result of a change in how it accounts for pension expenses.

But factoring out that change, profit would have risen, helped by strong growth in the company's consumer business -- driven by online shopping during the recent holiday season -- which overshadowed less-robust growth outside the United States, analysts said.

"The main driver is the U.S. economy and the ground business, with e-commerce performing especially well," said Matt Collins, an Edward Jones analyst in St. Louis, noting that at the same time the company managed capacity to keep profitable as Asia exports stayed slow.

"They've done a nice job adjusting to a slower growth environment. Whether it's new product offerings or cost controls, they've been able to deliver," he said.

Internet and catalog orders propelled UPS shipments during its record peak holiday season to nearly 500 million packages between Thanksgiving and Christmas, even as sales for traditional bricks-and-mortar stores were mixed, the company's Chief Executive Scott Davis told analysts on a conference call.

The company delivered 1.13 billion packages in the quarter, 3.6 percent from the same period a year ago.

"Clearly we saw a strengthening economy and a strong holiday season and frankly it stayed fairly strong into January," Davis said. "The U.S., while I wouldn't call it a robust economy right now, I do think a small package market is performing better than we would have thought four or five months

ago.

Meanwhile, a measure of consumer confidence unexpectedly fell in January on job market concerns.

Collins, who noted that revenue was slightly below estimates, said cyclical shares are down on Tuesday with another batch of soft economic reports. "Chicago PMI, consumer confidence and housing were all underwhelming today, so that certainly didn't help.

"The stock has had a really strong run, as has the market," added Donald Porter, sector specialist at Dalton, Greiner, Hartman, Maher & Co, which holds UPS shares.

"From an absolute basis, UPS is expensive. If I was an absolute investor, with the run it has had, I don't know if I would be piling in," he said. "For a long-term holder, though, it's a great well-run company with very high barriers to entry (for competition), that participates in international growth and deserves a premium multiple."

Atlanta-based UPS set an initial 2012 profit target of $4.75 to $5 per share for 2012, which would represent 9 percent to 15 percent growth over 2011 levels and at its midpoint is above the $4.80 per share analysts had expected.

Davis said UPS expects continued strong demand in its home market. "The U.S. is one of the few economies where expectations are greater than last year," he said.

UPS said it cut capacity 10 percent in the second half of the year in Asia from the early part of the year. Asia exports were flat in the quarter, driven by intra-Asia and Asia-to-Europe activity that offset lower exports to the United States.

UPS said it plans to spend $2.2 billion this year on capital improvements -- about 4 percent of revenue -- including the expansion of its European hub in Germany that will make it UPS's largest facility investment outside of the United States.

"We're continuing to show good growth in Europe, up by mid- to upper single-digits on shipments within Europe," Chief Financial Officer Kurt Kuehn said in an interview.

UPS delivered 15.7 million domestic packages per day, on average, up from 15.1 million in the fourth quarter 2010, and 2.6 million international packages, up from 2.54 million.

"Better-than-expected margins in both domestic and supply chain offset margin weakness in international(segments). But international volume growth, export volumes, were consistent with expectations," said Benjamin Hartford, a senior research associate at Robert W. Baird in Milwaukee.

In December, smaller rival FedEx Corp (FDX.N) reported above-forecast quarterly profits on on-line sales, cost curbs, fuel surcharges and other higher rates paid by shippers. It also announced a fleet upgrade meant to shave fuel costs.

PROFIT TOPS VIEW

UPS said fourth-quarter net income fell to $725 million, or 74 cents a share, from $1.025 billion, or $1.02 a share, a year ago. Its results for the just-ended quarter included a $527 million charge related to a change in how it accounts for pension expenses.

After adjusting for the pension-accounting shift, profit came to $1.28 a share, above the $1.26 analysts, on average, had expected, according to Thomson Reuters I/B/E/S.

UPS's decision to adopt "mark to market" pension accounting brings its practices in line with other major U.S. employers, including Honeywell International Inc (HON.N) and Verizon Communications Inc (VZ.N).

The shift can give companies a quick boost by removing billions of dollars in old pension losses from operating results, and bring companies closer to international accounting standards for pensions that become effective in 2013.

Fourth-quarter revenue at UPS rose 6 percent to $14.2 billion, compared with the $14.4 billion expected by analysts.

UPS shares are off 1 percent at $75.36 in midday trading on Tuesday, with Dow Jones Transportation average .DJT off 0.3 percent and FedEx down 1 percent.

The value of packages that UPS handles in its trucks and planes is equivalent to 6 percent of U.S. gross domestic product and 2 percent of global GDP, making it an economic bellwether.

(Reporting By Lynn Adler, writing by Scott Malone; editing by John Wallace, Maureen Bavdek and Gunna Dickson)