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FedEx Flops ... and UPS Follows

Let's start with a couple of random thoughts today.

RT No. 1: According to its website, UPS is billing itself as: "Ground reliability in the fast lane." 

RT No. 2: After reviewing archrival FedEx's (NYSE: FDX  ) earnings news last week,  particularly CEO Fred Smith's assertion that "Record high fuel prices and the weak U.S. economy" were responsible for hurting package volume in the U.S., I suggested that we wait and "see if UPS (NYSE: UPS  ) seconds that emotion next month."

Gee, that was fast. We didn't need to wait 30 days. Five days sufficed for UPS to echo FedEx's lament.

UPS slashed its own earnings expectations for the soon-to-be-reported second quarter by 15% yesterday. In doing so, the company practically stole the words out of Fred Smith's mouth: "Slow U.S. economic growth and an unprecedented increase in the cost of fuel have resulted in lower-than-expected U.S. package volume ... "

Actually, UPS went FedEx one better (or worse). Like UPS, FedEx saw volume for domestic shipments decline year over year last quarter. Yet FedEx still managed to report 1% volume growth, thanks to strength in its international segment, which was up 6%.  

UPS, however, isn't so lucky. According to management: "The anemic U.S. economy is negatively impacting package volume into the United States, affecting results for the International segment" (emphasis added). UPS didn't come right out and say it, but it's possible that Big Brown won't see its global volume-growth number saved by "international," as happened at FedEx last week.

Mind you, this does not necessarily mean that revenues will suffer. Like people movers Delta (NYSE: DAL  ) and AMR Corp (NYSE: AMR  ) , and pizza movers Yum! Brands (NYSE: YUM  ) and Domino's (NYSE: DPZ  ) , package movers FedEx and UPS have been adding fuel surcharges to their deliveries to help offset rising fuel costs. But while such surcharges reduce margin erosion, raising the cost of delivery dampens demand for the companies' services.

Foolish takeaway
The big question here, of course, is what UPS's Q2 warning bodes for the rest of the year. If business is already 15% worse than UPS was thinking just a couple of months ago, this at least suggests we could see the year's earnings prediction slashed by a similar amount. In which case, UPS could earn maybe $3.44 this year, which equals, essentially, zero profit growth since 2005.

Check out recent earnings news in:

Get our analysts' unvarnished views of FedEx at Motley Fool Stock Advisor (where we've recommended it) and of UPS at Motley Fool Income Investor (where we've recommended it).

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a picture-postcard disclosure policy.

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  • Report this Comment On June 24, 2008, at 2:58 PM, chitran wrote:

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