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Tickers in this Article: UPS
While preparing for the market week ahead on Sunday evening, I came across an interesting article by the Associated Press with the headline "Postal Agencies Respond to Mail Decline", and I couldn't help taking a look at UPS (NYSE:UPS).

The AP article stated, "In the United States, first-class mail volume has dropped 7% since 2001 - an average of 1.3 billion fewer letters, postcards and bills each year." So, where is all that volume going?

Aunt Jeanie Left Her Glasses Again
On a common sense level, it's pretty easy to see what's happening. We now pay our bills electronically, or, if you're like me, over the phone. The fact is, technology has made it easier for us to pick up the phone or log on to the internet, instead of taking the time to write out and mail a check.

Don't listen to me though, perhaps lend an ear to The Electronic Payments Association (NACHA), which represents more than 11,000 financial institutions. NACHA is a not-for-profit association that represents more than 11,000 financial institutions through direct memberships and a network of regional payments associations, and 585 organizations through its industry councils. The organization's last press release covering 2006 data stated, "NACHA estimates that 7.5-8.0 billion consumer bills were collected via the ACH Network in 2006, including pre-authorized debits, internet and telephone payments, and checks converted into ACH payments."

That's a boatload lot of first class mail lost! While the news of consumer's move to electronic payments versus snail mail may seem frightening, there's one thing we have to remember: You can't send the glasses aunt Jeanie left at your house over Christmas back to her through the internet. (For more on this type of top-down strategy, check out Taking Global Macro Trends To The Bank and A Top-Down Approach To Investing.)

Unionized Losses
In the fourth quarter, UPS reported a loss of $2.46 per share, down from a profit of $1.04 per share in the same quarter a year before. However, it wasn't shipping that hurt the bottom line... it was a $6.1 billion pension-related charge "to withdraw approximately 45,000 UPS employees from the Central States multi-employer pension plan and expensed to the U.S. Package segment". So, even though the initial EPS numbers look bad because of that pension-related charge, don't forget that revenue increased to $13.4 billion in the quarter from the $12.6 billion top-line number seen in the year ago period. Without the pension charge, UPS would have earned $1.13 a share for the quarter. (To learn more, see How To Evaluate The Quality Of EPS.)

One other bottom line we need to pay attention to is the volume within the company. In the fourth quarter, the company witnessed average volume per day increase to 17.7 million pieces from 17.3 million. Keep in mind, this was a grisly Christmas for retailers and the economy. Even with higher gas prices faced by the U.S. the consumer and a sluggish economy, volume and revenue were up, which is definitely a good sign.

Say Something Pretty
Investors should focus on the second part of CFO Kurt Kuehn's comments in the company's earnings press release: "While there is more uncertainty in the U.S. economy today than there was a year ago, we remain focused and confident that we will grow our global business." Things at home look scary, but given that UPS serves more than 200 countries worldwide, it's certainly well-poised to expand.

Interestingly, even though the company reported a quarterly loss, and the executives sprinkled the earnings press release and conference call with negative comments about the U.S. economy, the company still increased the quarterly dividend from 42 cents a share to 45 cents a share.

The Bottom Line
The U.S. economy is still going to mess with United Parcel Service somewhat, but given that the company already runs a pretty tight ship, it looks reasonably recession resistant. The executive team's cognizant move towards pulling additional revenue from international sources will certainly help too.

At the end of the day, with everything happening in the U.S. economy, it would be just plain dumb to bet the farm on United Parcel Service, but it would be even more silly to think the company is riddled with uncorrectable problems. After the earnings dust has cleared, UPS is doing a pretty darn good job, and it seems the decline in first class mail isn't really affecting the package shipping companies. On a final note, FedEx reports on March 20, 2008, a date shipping-enthusiasts will certainly want to keep an eye on.

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