Leading parcel delivery company,
United Parcel Service Inc.
) 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
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
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
). 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)
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