Transports got slammed WED. UPS Woes?

UPS woes run deeper than weather

By Matt Andrejczak & Padraic CassidyLast Update: 4:48 PM ET Jan. 12, 2005
SAN FRANCISCO (CBS.MW) - When UPS blamed winter storms and sluggish demand for a weaker-than-expected fourth quarter, the package carrier roused suspicions it faces troubles that run far deeper than the weather.
Investors responded to the news by sending UPS (UPS: news, chart, profile) shares tumbling Wednesday. The stock fell $6.18, or 7.4 percent, to $77.18, a move accompanied by two Wall Street downgrades.
Atlanta-based UPS is facing stiffer competition for ground deliveries, higher-than-expected costs to roll out new technology to sort packages and tighter margins as its business mix shifts to the consumer market, analysts suspect.
"There are many things not operating smoothly," Bear Stearns analyst Edward Wolfe said in a research note. He called the UPS earnings shortfall a "big miss."
UPS said it would miss Wall Street's consensus estimate by 12 percent. Excluding a better-than-expected tax rate, it expects a fourth-quarter profit of 75 cents to 76 cents a share, down from its prior expectation of 83 cents to 87 cents a share.
Investors found it hard to buy UPS' rationale for a lower profit. The company's main rival, FedEx (FDX: news, chart, profile), was quick to note it remains on track to meet its quarterly forecast.
Equities analysts at J.P. Morgan and Credit Suisse First Boston both cut UPS to "neutral" on Wednesday.
UPS is losing market share to FedEx and DHL for ground shipments, analysts assume. UPS said domestic package volume growth slowed to 1.6 percent for the quarter, well-below Wall Street's forecast of about 4 percent.
DHL is winning over parcel shippers with deep discounts, J.P. Morgan said. It noted that parcel shippers plan to boost spending with DHL to 18 percent in 2006, up from 13 percent.
"The company's results could be negatively affected by an industry price war, particularly over the long term if DHL looks to take market share," J.P. Morgan analyst Gregory Burns said.
Consumers have turned to UPS as a shipping option after the company acquired Mail Boxes Etc. Consumer package volume makes up 25 percent of UPS' shipments, up from 15 percent in 1999, according to Bear Stearns estimate.
But that has had its consequences on the bottom line: The consumer market is typically less profitable than the business market, Bear Stearns said.
Warning sends ripples
UPS' warning knocked other transportation and logistics stocks down Wednesday, part of a slate of mixed news for the sector, said analyst Jack Waldo of Stephens Inc.
Shipping stocks have come under pressure in the last few weeks over fears of rising inflation, rising oil costs - up since the end of the 2004 - and hints of rising capacity, said Waldo.
But overall, the sector is preparing for a positive fourth-quarter earnings period.
"Investors are waiting around for some good news from our truckload and our [less-than-truckload] carriers, and we're optimistic that that good news will come in the form of fourth-quarter earnings releases at the end of the month and comments on current business conditions, which we still think are pretty strong."
As examples, Waldo said, in the last two weeks, SCS Transport Inc. (SCST: news, chart, profile) said it would meet the midpoint or above their earnings projections, Yellow Roadway (YELL: news, chart, profile) affirmed its outlook and Old Dominion Freight Line (ODFL: news, chart, profile) announced an acquisition that would boost 2005 earnings.
"There are no company-specific comments within my industry, sans UPS, that would warrant this type of sell-off," he added.
Stocks falling included Overnite Corp. (OVNT: news, chart, profile), which fell 2.7 percent to $33.04; logistics firm Pacer International (PACR: news, chart, profile), which dropped 3.9 percent to $20.72; and C.H. Robinson (CHRW: news, chart, profile), which slumped 3.2 percent to $53.42.
Matt Andrejczak is a reporter for CBS.MarketWatch.com in San Francisco.Padraic Cassidy is a reporter for CBS MarketWatch in New York.