UPS cites weak U.S. economy after loss

CHICAGO (Reuters) - United Parcel Service Inc (UPS.N) reported a 12 percent decline in quarterly profit on Wednesday, citing a sharp decrease in U.S. economic activity, and the No. 1 package delivery company cut its 2008 earnings forecast.

"U.S. economic activity deteriorated more rapidly than expected during the quarter," Chief Executive Scott Davis said in a statement, adding that "we will be extremely vigilant with respect to costs in this difficult environment."

Like its main rival, FedEx Corp (FDX.N), UPS is considered a bellwether of U.S. economic activity. Last month FedEx reported a 7 percent decline in quarterly earnings.

"We see no signs of economic strengthening in the second quarter," said UPS Chief Financial Officer Kurt Kuehn.

Growth in U.S. export volumes, thanks to the weak dollar, were a bright spot in an otherwise gloomy picture.

The Atlanta, Georgia-based company reported first-quarter net income of $906 million, or 87 cents a share, compared with $1.03 billion, or 96 cents a share, a year earlier.

Analysts' average earnings forecast was for 86 cents per share, according to Reuters Estimates. UPS lowered its first-quarter earnings outlook earlier this month due to weakening U.S. economic activity.

Keith Schoonmaker, an analyst at Morningstar, said he had expected UPS' results to be affected by customers' "shifting to lower-priced deferred delivery products" and "pain from the fuel surcharge's lagging continued fuel price increases."

Like many other transport companies, UPS passes on fuel costs to customers via surcharges, but with a time lag. This means price spikes hurt the company in the short term, but UPS then recoups the money when prices come down.

"For investors with a long time horizon, dips in volume due to a soft domestic economy may provide buying opportunities for both (UPS and FedEx) as the market overreacts to short-term bad news," Schoonmaker said.

UPS shares were little changed, down 5 cents at $71.85 in late morning trade on the New York Stock Exchange.

CUSTOMERS TRADING DOWN

In a conference call with analysts, Kuehn said UPS has seen a "trade-down" by customers to lower-cost services in all sectors, a shift "most prevalent in retail."

He added that the company expects U.S. package volumes in 2008 to be flat to down 1 percent, with the third quarter the weakest of the year.

UPS, like FedEx, said first-quarter results were also hurt by sharply higher fuel costs.

In a research note, R.W. Baird & Co analyst Jon Langenfeld reiterated an "outperform" rating on UPS stock, citing the company's "ability to manage variable costs," its $10 billion share buyback program, and its recent labor agreement with the Teamsters union.

UPS said revenue in the first quarter rose to $12.7 billion from $11.9 billion a year earlier. Analysts had expected $12.32 billion.

UPS' volume of 968 million packages in the quarter was unchanged from a year earlier.

U.S. daily package volume dipped 0.3 percent in the quarter, but export volumes grew 10 percent in UPS' international business.

For the current quarter, UPS said it expects earnings of 97 cents to $1.04 a share, compared with $1.04 in the second quarter of 2007. Analysts, on average, expect $1.01.

For the full year, it lowered its earnings forecast to a range of $3.90 to $4.20 per share, down from a previous range of $4.30 to $4.50. Analysts expect $4.13.

Kuehn told Reuters in a telephone interview that the company expects U.S. export volumes to continue at double-digit levels thanks to the weak dollar.

"U.S. exports are the only bright spot in an otherwise dark sky right now," the CFO said.

UPS also expects to see continued strong growth in package volumes between Europe and Asia, he said.

(Reporting by Nick Carey, editing by John Wallace and Tim Dobbyn)