Bellweather UPS Cuts Forecast Amid Global Macro Headwinds

UPS (NYSE:UPS), the largest package-delivery and global supply-chain management company and an economic bellwether, fell 2.5% after missing both top-line and bottom-line expectations in the latest quarter. Despite some improvement in the domestic freight and shipping volumes over last year, the company’s results were weighed down by weak international demand and a double digit decline in the export delivery demand from Asia. UPS also cut its forecast for the second half of the year citing global economic uncertainty, debt crisis in Europe and pessimism among customers. UPS competes with FedEx (NYSE:FDX) and national postal services agency USPS (United States Postal Service).

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Demand Might Weaken In H2

Last quarter, UPS’s domestic revenue increased 4.1% over the prior-year period, driven by a 3.5% gain in package volume. The volume growth was more inclined towards cheaper and deferred packages like the deferred air segment whose volumes improved 8.6%. This was in-line with the recent trend of customers shifting from premium services to slower or deferred products and sea-borne shipping while seeking lower expenses. A significant part of the volume boost was driven by large e-commerce customers shipping low-weight residential packages. This reflected in the average revenue per package that just increased 0.6% despite higher pricing as higher base rates were offset by changes in customer and product mix. Operating margin improved by 100 bps due to improved pricing and volumes but suffered due to adverse mix.

At the same time, increasing macro uncertainty in the U.S., continuing weakness in Asian exports, the sovereign debt crisis in Europe and pessimism among customers led to dilution of the company’s forecasts for the remaining fiscal. UPS expects the U.S. GDP growth might slow down to 1% this year, much lower than its previous expectations as consumer spending and retail sales have continued to slow down and unemployment rates still remained critical.

International Weakness Further Weighs Down

Q2 also witnessed continuation of weak global trade performance that began in Q1. This brought UPS’s international revenues under pressure, weighed down by a double digit decline in export demand from Asia to Europe and the U.S. Even the non-U.S. domestic volumes contracted 3.2%, particularly in Europe. The trend resonated in the results of rival FedEx whose international priority shipments volumes from Asia to North America and Europe also declined last quarter.

We are in the process of revising our $86 Trefis price estimate for the UPS stock.

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