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UPS, FedEx profit warning
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December 14, 2000: 3:00 p.m. ET
Sluggish holiday lowers UPS income; FedEx to beat 2Q target but miss year's
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NEW YORK (CNNfn) - United Parcel Service Inc. and its delivery service competitor FedEx Corp. both warned investors Thursday that sluggish holiday shipments will hit future profits.
Atlanta-based UPS, the world's largest transportation company, said it expects 7 to 10 percent fourth-quarter profit growth, which translates to earnings of 60 cents to 62 cents a share. Analysts polled by earnings tracker First Call had expected Atlanta-based UPS to earn 64 cents a share.
Meanwhile FedEx says it will actually top First Call's current forecast for the its fiscal second quarter, which ended Nov. 30, when it reports results next week. But it warned that-second half results will be far below current forecasts, and that assumes the U.S. economy has a so-called "soft landing" rather than falling into recession.
FedEx says it will report earnings of 67 cents a share when it releases second quarter results next week. First Call's consensus forecast is for FedEx to earn 64 cents a share in the second quarter, up from 57 cents a share in the year-earlier period.
But the Memphis-based express carrier also says it now expects full year earnings of $2.50 to $2.60 a share, which means it will earn between $1.15 to $1.25 a share in the second half of its fiscal year, compared with the current First Call estimate of $1.46 a share in that six-month period.
 The warnings sent shares of UPS (UPS: Research, Estimates) down $4, or 6 percent, to $58.63 on the news of the warning, although that was up from a low of $58.13 immediately after the announcement. Shares of FedEx (FDX: Research, Estimates) shares also plunged, losing $4.28, or 9 percent, to $42.
"FedEx is experiencing a softening in volumes due to the slowdown of the U.S. economy and recent severe weather conditions," said the company's statement. "As a result, U.S. domestic growth rates at FedEx Express and FedEx Ground are expected to be flat to slightly down for December 2000." The company is also seeing a softening in shipments from Asia, which had been a growth area for the business.
While this is the first formal earnings warning for UPS since its initial public offering in November 1999, the Atlanta-based parcel delivery company had earlier said that a slowing in the economy and one fewer shipping day in this year's holiday season would limit income growth in the period.
UPS's statement Thursday that the first two weeks of the holiday season have seen none of the expected gain in shipment volume from year-earlier levels. In addition, it saw slower domestic volume growth in October and November, equal to 4 percent over year-ago results, compared with 5.5 percent growth for the first five months of the year.
UPS Spokesman Norman Black said the company previously had given guidance of fourth-quarter growth in the "mid-teens." UPS said it will still meet its internal company profit target for the full year, and that the outlook for 2001 still is strong.
"Barring further economic slowing, we expect to achieve the targets we set for 2001 -- 10 percent revenue growth and earnings-per-share growth in the mid-teens," said UPS Chairman and CEO Jim Kelly in a statement.
First Call calls for UPS to earn $2.71 a share in 2001, which would represent 15 percent growth from current 2000 earnings guidance.
UPS's warning came early Thursday, prompting analysts to lower estimates not only for UPS but for FedEx, which issued its warning just after noon.
 "Slowing growth is looming for the parcel carriers, in our view," said Ed Wolfe, analyst with Bear Stearns. "Evidence of the slowing U.S. economy is abundant. Although the parcel carriers have reported a slowdown in growth, we are convinced that they will not be immune to the significant slowing in U.S. economic growth that is currently taking place."
In addition to lowering his FedEx forecasts before the announcement, Wolfe also lowered his rating on UPS stock from "attractive" to "neutral" as he dropped his 12-month price target for the company to $60 from $64. He also cut his 2001 earnings estimate for UPS to $2.40 a share from $2.50, and his 2002 earnings estimate to $2.80 a share from $2.88. First Call's consensus forecast calls for 2002 earnings of $3.09 a share.
But Jeff Kaufmann, analyst with Merrill Lynch, said Thursday's market overreacted to the warnings. He says that recent acquisitions by both companies and the granting of rights to UPS to start serving China next year should help ensure growth at the companies, even with a slowing economy. He reiterated his accumulate/buy recommendations on the company, particular with the weakness in the stock. 
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UPS
FedEx Corp.
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