Leading freight carrier, United Parcel Service, Inc. (UPS) has slashed its earnings forecast for 2013 to $4.65 to $4.85 per share from $4.80 to $5.06. The current projection represents a year-over-year growth of 3% to 7%, lower than the previously estimated 6% to 12%. The company in its press release stated that the present macroeconomic conditions could hamper its growth and quarterly performance going forward.
The company’s latest revelation has led to a negative market sentiment, pushing stock prices 5.83% down on Friday trading over the previous day’s adjusted closing. UPS now expects second quarter earnings per share of $1.13, below the earnings of $1.15 in the corresponding quarter last year but up from $1.04 earned in the preceding quarter.
Previously, the company had already hinted that earnings per share growth would remain at low single digits for the second quarter due to operating margin pressure. Despite several profitability measures, the company is struggling to cope with the changing market scenario that resulted in customers shifting from premium products as they seek more cost effective logistic solutions.
Over the past year, the company has been registering lower demand from international business lanes, in particular from Asian routes. As a result, the company has been seeking several capacity adjustment measures to maintain parity with the changing demand environment. According to reports, UPS had undertaken restructuring worth $1.7 billion last year to adjust with the overcapacity issues in the freight forwarding market.
In Feb, UPS reported of expanding its Less Than Container Load (LCL) services to additional networks in Asia, Europe, the Middle East, Africa, and South America, bringing its network to 17,000 direct LCL lanes serving 116 countries. The company’s expanding presence in the LCL space implies a shift from its airfreight business. This would ultimately benefit the cost structure and serve as an attractive opportunity to add customers in the present economy. Further, not only will UPS’ ocean business will get a boost from this move, shippers too can gain from cost savings against the expensive airfreight.
In addition to these macroeconomic factors, UPS also remains challenged by pension headwinds that are expected to occur this year as the company is set to offer severance package to employees who are accepting voluntary buyouts. Further, prevailing lower interest rates on funds are also hurting the company by increasing its pension expenses. In January, the company estimated pension cost to increase by $225 million in 2013.
Apart from UPS, close rival FedEx Corp. (FDX) has also taken similar steps to ensure business viability in a poor market scenario. The company is also taking initiatives to reduce Trans-Pacific capacity since Apr. FedEx is aggressively working on plans to curb over-capacity from Asian lanes to adjust traffic in lower yield networks and in this context, it expects to remove some of its networks between the U.S. and Asia in July.
FedEx has also set a 2016 end target of $1.6 billion in incremental profit at FedEx Express and 2020 target of 30% improvement in fuel efficiency of its fleet. Other than gaining $200 million in cost savings from the Voluntary regiment plan, the company expects these profits to arise from infrastructural developments like aircraft modernization, aircraft maintenance processes, fuel consumption, increased productivity in pick-up and delivery services. Other than the two giants – UPS and FedEx – we believe the current market conditions do not bode well for other industry players and may affect the upcoming results of Expeditors International of Washington Inc. (EXPD) and Atlas Air Worldwide Holdings Inc. (AAWW)
UPS currently has a Zacks Rank #3 (Hold).
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