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Tickers in this Article: UPS, FDX, YRCW, EBAY, EXPD
Shares of United Parcel Service (NYSE:UPS), which bills itself as the world's largest package delivery company, continue to reel as business and consumer activity has slowed dramatically in what has proven to be a very challenging economic environment. This has led to significantly lower levels of package and shipment delivery, which happens to be the bread and butter that keeps UPS ticking. Yet, despite the depressed activity, UPS continues to build out its global infrastructure, and will come out of the current downturn as strong as ever.
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Recent Results
Second quarter results demonstrated the extent to which UPS is being hurt by challenging global economic trends. Revenue declined 16.7% on a 12% fall in U.S. domestic packaging (63% of quarterly sales) and more than 20% declines in international packaging (21% of sales) and supply chain & freight (17% of sales). Profits fell by nearly half in the flagship U.S. operations, nearly 30% in international package, and just under 15% in the supply chain segment. The end result was a 48.2% plummet in diluted earnings to 44 cents per share.

Arch rival FedEx (NYSE:FDX) is set to report fiscal first quarter results in mid-September and detail nearer-term trends. Indications are that it will also suffer from sales and earnings declines and continue its struggles from the most recent quarter that saw revenues decline 20% to $7.85 billion and operating earnings fall by more than half to 64 cents per share.

Management expects third-quarter earnings between 45 cents and 55 cents as "the business environment in the third quarter should be similar to the second quarter." It also detailed that while business appears to be stabilizing, it still has yet to strengthen. Analysts are currently projecting full-year revenue to fall nearly 13% and earnings per share of $2.13, or down approximately 28% from last year's bottom line.

The Bottom Line
Business conditions return will eventually return to more normal levels and businesses will return to shipping packages via UPS, FedEx and also utilize logistics services that compete with the likes of YRC Worldwide (Nasdaq:YRCW) and Expeditors International (Nasdaq:EXPD). Consumers demand will also begin to heat up again across the globe as they start buying again from businesses and popular consumer websites such as eBay (Nasdaq:EBAY).

UPS stands to benefit from the inevitable upswing in the business cycle and report earnings normalized earnings in the ballpark of $3 per share. Free cash flow generation should also improve and is actually holding up quite well as UPS continues to repurchase shares and pay a current dividend yield of 3.4%. So while the current forward P/E multiple appears lofty at close to 25, it is in the mid-teens when profits return to more normalized levels. This is much more reasonable and investors are getting paid to wait for business conditions to improve. (For more, see Earnings Forecasts: A Primer.)

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