UPS Sees Cooling Demand Showing Lower U.S. Economic Gains
United Parcel Service Inc. (UPS) predicted the U.S. economy will grow 1 percent in the rest of 2012 as slowing volume growth prompted the world’s largest package- delivery company to conclude average forecasts are too high.
The projection by UPS, an economic bellwether because it moves goods from financial documents to pharmaceuticals, contrasts with a 2.2 percent growth rate predicted by economists in a Bloomberg survey.
“Right now, the estimates are a little too optimistic,” Chief Financial Officer Kurt Kuehn said in a telephone interview. “We’re not trying to ring the alarm bell, but we do think that there’s probably a little more likelihood that the numbers will turn lower than estimates.”
UPS is bracing for the slower growth, reducing its full- year profit outlook today to $4.50 to $4.70 a share from $4.75 to $5 after second-quarter earnings trailed analysts’ estimates. Revenue in the International Package business, the company’s second-largest, dropped 4 percent to $3.01 billion as exports from Asia to the U.S. and Europe decreased.
“International volume is particularly weak,” Kevin Sterling, an analyst at BB&T Capital Markets in Richmond, Virginia, said in a telephone interview. “They are not immune from China softening and everything happening in Europe.”
FedEx Corp. (FDX), the operator of the biggest cargo airline, has encountered similar pressures internationally. Last month, the Memphis, Tennessee-based company cited Europe’s debt crisis and a slowdown in Asia when it gave a smaller profit forecast than analysts estimated for the fiscal year ending in May.
UPS is reducing its Asian air network by 10 percent, to the size it was in 2009, mostly by decreasing the frequencies of flights, Kuehn said.
“The Asia export story has been a really significant shift,” he said. “We are seeing shipments within Asia continue to grow and we think that’s a trend that’s going to become increasingly important.”
The company is predicting an uptick in Asian exports in the fourth quarter driven by product introductions from large manufacturers.
A declining euro exacerbated currency fluctuations that pulled International Package yields down about 4.5 percent, UPS said.
Second-quarter net income climbed 2.2 percent to $1.12 billion, or $1.15 a share, from $1.09 billion, or $1.09 a share, a year earlier, as U.S. domestic package revenue increased. Volume gains there were driven by lightweight shipments from online retailers to their customers, UPS said.
Companywide revenue climbed 1.2 percent to $13.3 billion, UPS said. Growth was slower than last quarter’s 4.4 percent expansion partly because of customers opting for cheaper shipment options.
“The deferred products are still leading the pack,” Logan Purk, an analyst at Edward Jones & Co. in St. Louis, said in a telephone interview. “Clients are still choosing the slower methods of delivery and that is impacting results in terms of yield.”
Kuehn said softening in the U.S. economy has come with a “gradual deceleration” in business-to-business shipments, which make up more than 60 percent of the UPS network. The business-to-consumer component continues to show “fairly solid growth,” he said.
UPS dropped 5.5 percent to $73.70 at 12:24 p.m. in New York, following a 5.6 percent decrease that was the largest intraday since August. The shares previously gained 6.5 percent this year.
UPS, which is seeking to expand in Europe with the $6.5 billion acquisition of TNT Express NV (TNTE), said it expects to complete the purchase in the fourth quarter. The deal is the biggest in the company’s 105-year history.
“Europe continues to be a good story for us,” Chief Executive Officer Scott Davis said on an earnings call. “Intra- regional shipments are continuing to show growth.”
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