UPS cites weak U.S. economy after loss

By Nick Carey

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.