Why UPS Earnings Are in Trouble

United Parcel Service (UPS 0.34%) will release its quarterly report on Tuesday, and in a world in which package delivery and Internet commerce go hand in hand, you'd think that everything would be rosy for the carrier. Yet the UPS earnings preannouncement earlier this month suggested otherwise, raising some doubts about the company's immediate future and sending shares down as a result.

UPS provides a wide range of services, ranging from lightning-fast overnight air delivery to slower ground transportation. With so much of its business dependent on macroeconomic trends, the sluggish global economy has had a big impact on not only how much it's shipping but also the ways in which customers are choosing to get things where they want. Let's take an early look at what's been happening with UPS over the past quarter and what we're likely to see in its quarterly report.

Stats on UPS

Source: Yahoo! Finance.

How much will UPS earnings get hit?
Analysts have had to reduce their views on UPS earnings recently, with estimates for the June quarter having fallen by a dime per share and full-year 2013 calls getting cut by more than double that amount. The stock has actually held up quite nicely, rising more than 7% since mid-April.

Most of those analyst downgrades have come in the past week or so, in light of the company's own preannouncement of its second-quarter earnings expectations. UPS projected earnings of $1.13 per share, below the $1.20 that analysts had expected prior to the announcement. Citing a slowing domestic economy, overcapacity in the air-freight market, and customers choosing lower-cost shipping options, UPS also cut its 2013 estimates to $4.65 to $4.85 per share.

Fortunately for UPS, the trend toward cheaper shipping has less of an impact on it than on rival FedEx (FDX 0.11%), which relies much more on high-speed options. In its most recent quarter, profits in FedEx's express business dropped by two-thirds, and that pulled overall operating income down by 28%.

UPS has some other problems of its own. Although workers approved a new master union contract for its 235,000 employees that will run through 2018, freight employees rejected a proposed deal that their union said would have changed health-insurance coverage for 140,000 workers. With a July 31 deadline, negotiations apparently haven't resulted in a settlement of the labor dispute yet. UPS cited the labor negotiations as slowing package volume growth as well.

Still, the big catalyst for future growth remains online commerce. Internet sales rose 16% in the U.S. last year, yet with e-commerce representing only about 5% of total sales of consumer goods, there's still plenty of room for further gains. Key relationships with Amazon.com (AMZN -1.14%) will be important to maintain as the online leader continues to seek ways to expand its reach, but UPS also needs to ensure that it gets its share of competitors' shipping volume as they seek to dethrone Amazon's dominance of the sector.

With the UPS earnings preannouncement already having answered many questions, investors should focus on initiatives the company is making to try to keep costs under control. Things like expanding its natural-gas fleet of trucks should help it take advantage of lower fuel costs and increase efficiency, but cost-cutting can only do so much without a boost in global economic activity.

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