UPS: A Big Brown Disappointment

Shares of the package delivery company fell Tuesday after its quarterly results fell short of Street expectations

United Parcel Service (UPS), buffeted by headwinds from the slowing U.S. economy, announced financial results on Jan. 30 that disappointed the market. But the Atlanta package delivery giant has been trying to build up its presence in countries like China during recent years, and its business overseas has been staying afloat.

UPS' net income amounted to $1.13 billion during the three months ended Dec. 31, up 7.5% compared to the same period last year. "We finished the year with a well-executed peak season, and strong execution will continue to be critical for us as we move forward in 2007," CEO Mike Eskew said in a press release Jan. 30.

UPS has been pushing in recent years to expand globally, as its rival FedEx Corp. (FDX) rushes ahead to grab customers who are shipping products from places like China (for more see, 04/03/2006, "FedEx:Taking off like "a rocket ship".) UPS launched a non-stop delivery service between the U.S. and Guangzhou, China in 2005. The same year, UPS acquired the interest held by its joint venture business partner in China, giving it access to 23 cities that cover most of the country's international trade. In recent months UPS also announced that it would provide three time-definite delivery options each day to the world's 30 largest markets, instead of only one or two options per day (see, 4/3/06, "FedEx: Taking off like 'a rocket ship'").

The Atlanta company's total sales rose 5.6% year over year to $12.6 billion during the fourth quarter, while its international package revenue gained 9.9% year over year.

"We anticipate another good year in our global small package business despite a slowing U.S. economy," said UPS' CFO Scott Davis in a press release. Davis thinks UPS' earnings per share for the full year 2007 will increase to within a range of $4.10 to $4.25, compared to the $3.86 reported in 2006.

After the news Standard & Poor's Corp. analyst Jim Corridore lowered his 2007 earnings per share estimate on the stock to $4.20 from $4.30. Corridore wasn't the only one to respond to the news with disappointment, either. Investors sold UPS stock 2.8% to $71.60 per share in early afternoon trading on the New York Stock Exchange Jan. 30. The stock has risen in recent months from its low of the year on Aug. 10 at $65.50 per share, but remains much cheaper than its high on May 8 of $83.99 per share.

Corridore thinks the shares are trading at a low valuation when you consider the stock price's relationship to UPS's earnings. He also expects "UPS to continue to generate cash and post strong returns on equity and invested capital," Corridore said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.)

UPS ended 2006 with nearly $2 billion in cash and marketable securities, after generating $5.7 billion in cash from its operations.

"The company expects its performance in 2007 to be a bit soft relative to its long-term goals, but we believe that is a fair assessment, given an uncertain economy," Morningstar analyst Peter Smith said in a research note. "We see room for upside if industrial production bounces back."

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