Will UPS Earnings Soar Past Those of FedEx?

United Parcel Service (NYSE: UPS  ) will release its quarterly report on Friday, and investors have been pleased with the delivery service stock's ascent to all-time record high levels. With the economy continuing to show signs of recovery, UPS earnings should grow this quarter. But the bigger question is whether the shipping giant can continue to hold rival FedEx (NYSE: FDX  ) in check as the key holiday season approaches.

UPS has benefited greatly from the increase in popularity of free-shipping options for online and mail-order retailers. Strong relationships with Amazon.com and other major retail operations have played a substantial role in UPS's overall growth over the long run. But with early projections suggesting that retail sales growth over the holiday season this year could decline from recent years, will UPS suffer from lower volume or benefit from more retailers adding free shipping as an incentive to their shoppers? Let's take an early look at what's been happening with United Parcel Service over the past quarter and what we're likely to see in its report.

Stats on United Parcel Service

Analyst EPS Estimate

$1.15

Change From Year-Ago EPS

8.5%

Revenue Estimate

$13.6 billion

Change From Year-Ago Revenue

4%

Earnings Beats in Past Four Quarters

1

Source: Yahoo! Finance.

Will UPS earnings deliver the goods this quarter?
In recent months, analysts haven't budged on their views on UPS earnings, keeping estimated unchanged from now through the full 2014 year. The stock, though, has climbed nicely, gaining 8% since late July.

UPS came into the quarter on a mixed note, reporting second-quarter results that fell short on revenue but matched investors' expectations for earnings. Gains in shipping volumes were encouraging, with international growth of 5% pointing to improving conditions in the global economy. But margins fell due to adverse currency impacts and higher fuel costs, and the company cited moves from its international customers to choose lower-cost options over high-speed next-day service. Those results were consistent with what FedEx saw in its results, as its ground segment captured just about all of its overall revenue growth while its core express business saw almost flat sales.

Despite some concerns about holiday spending this year, UPS could nevertheless see solid growth in the coming quarter. FedEx said yesterday that it expects a 13% jump in shipments during the first week of December, pointing to the Cyber Monday date of Dec. 2 as being the busiest day of the season. UPS should capture its share of increased volume as well, but FedEx is aiming at cost-conscious holiday shippers with its newly announced One Rate flat-rate shipping option to simplify its extremely complicated schedule of delivery charges.

The big unknown for UPS coming into the holiday season is the status of its labor union contracts. Earlier this year, the company successfully negotiated a national master contract with union employees, but several key local unions still haven't approved their own agreements. In particular, the union that represents workers at UPS's Louisville Worldport hub has voted against its contract and still needs to negotiate and vote on a supplemental contract. Investors have based their bullish views on a favorable resolution to the conflict, but anything other than an ideal resolution could hurt the business at its most important time of year.

In the UPS earnings report, look closely at United Parcel Service's segment results to see if the trend toward lower-cost shipping options is continuing. A reversal in fuel costs could help bolster earnings in the short run, but longer-term issues like labor negotiations and cost-cutting efforts will have a greater impact on United Parcel Service's prospects well into the future.

Will UPS rule online retail?
The rise of online retailers like Amazon has had a huge impact on UPS and FedEx, but it's also changed the landscape for the retail industry as well. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the "3 Companies Ready to Rule Retail" in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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