Leading parcel delivery company, United Parcel Service Inc. (UPS) has exhibited its concerns over the imminent slowdown in the manufacturing business in Asia. The company expects this slowdown to reduce its overseas business, which in turn would impact its short-term financial performance. According to the company, this downtrend in manufacturing orders is due to lower exports in China. Recent reports suggest that the Chinese overseas shipments gained 2.7% in August on a year-over-year basis. On the other hand, imports dipped more than 2%, creating a trade surplus of more than $26 billion.
Moreover, this year UPS expects the U.S. economic recovery to be slow, impacted by the prevailing crisis as well as changes in the U.S. budget and tax policies. These external factors are likely to weigh on its earnings.
Consequently, the company reduced its adjusted earnings guidance to $4.50-$4.70 from the previous projection of $4.75-$5.00 per share for fiscal 2012. The current projection represents a growth of 3-8% over fiscal 2011 adjusted earnings, down from 9-15% growth projected previously.
United Parcel Service expects U.S. Domestic Package revenue to grow in the range of 1-2%, down from its previous projection of mid single-digit growth. The company expects U.S. Domestic Package average daily volume growth to moderate due to unfavorable macroeconomic factors.
It also expects lackluster volume growth in premium and B2B products as customers are seeking more cost effective logistic solutions. Further, the company expects compensation and benefit expenses to rise 1% due to the increase in health care costs.
Despite the challenging economic conditions, we remain encouraged by UPS' continued productivity gains, improved operating profit, and strong free cash flow.
Over the long term, we believe the company will continue to invest in technology and network enhancements that would provide a competitive edge over its peers like FedEx Corporation (FDX). Its integrated sales approach also promises future growth given its industry-leading margins and financial strength. The company is also seeking capacity adjustment by reducing its Asian air networks by 10% to improve cost structure.
Currently, we have our long-term Underperform recommendation on UPS. For the short-term the stock has a Zacks #4 Rank (Sell)