Global logistics heavyweight United Parcel Service, Inc. (NYSE:UPS) Friday slashed its profit forecast for the upcoming quarter, citing weak U.S. industrial activity and air freight overcapacity. The stock dropped the most since 2011. Before today, the stock had gained 24 percent, while FedEx increased 14 percent.
United Parcel Service, Inc. (NYSE:UPS) forecasts that adjusted earnings will rise to $4.65 to $4.85 a share in 2013, down from its earlier prediction of $4.80 to $5.06.
UPS and Fedex are B2B Economic Bellweathers
Overcapacity in the global air freight market, increasing customer preference for lower-yielding shipping solutions, and a slowing U.S. industrial economy drove revenue and operating profit below expectations.
Both United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) are often seen as bellwethers for the world economy, given their important role connecting businesses.”They had a strong start to the year, so this is an indication that the global recovery remains choppy, for certain,” analyst Joshua Herrity of New York-based Telsey Advisory Group said.
The slowing of the U.S. economy and worldwide air freight overcapacity prompted UPS, the express parcel delivery service, to cut its full-year earnings forecast and warn on the outlook for second-quarter profits and revenues.
The warning from United Parcel Service, Inc. (NYSE:UPS) – which said second-quarter diluted earnings per share would be $1.13 against $1.15 for the same period in 2012 – follows similar warnings in recent months by FedEx, the company’s main rival.
UPS and Rivals Losing Preferred Business
FedEx warned as long ago as September that it was suffering from customers’ growing preference for its cheaper FedEx Ground services over its more expensive air offerings and for slower delivery of air packages. FedEx Corporation (NYSE:FDX) said on June 19, when it announced its results for the year to May 31, that it was planning further capacity cuts on top of a series of accelerated retirements of aircraft announced in early June. A statement by United Parcel Service, Inc. (NYSE:UPS) on Friday was strikingly similar.
While express parcel and logistics operators such as United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) are vulnerable to swings in world economic demand, they are also exposed to changes in air cargo capacity. Air cargo rates have been depressed by significant deliveries of pure air cargo aircraft such as the new Boeing 747-8F freighter, as well as the expansion of capacity in the cargo holds of new, long-haul twin aisle jets such as Boeing’s 787 and Airbus’s A380.
Will UPS Attack Issues or Ride Out Economy?
“The severity of it was more than we were anticipating,” said James Corridore, an analyst at S&P Capital IQ in New York, who rates UPS a Buy. “What will be interesting to see is how UPS intends to attack these issues.”