UPS Shares Sink to 5-Year-Low After Profit Warning

United Parcel Service shares fell 4.6 percent Tuesday to their lowest point since late 2003, the morning after the world's largest package-delivery company cut its second-quarter profit outlook citing high fuel costs and a weak U.S. economy.

Chris Gardner

came just a week after main rival Memphis-based FedEx Corp posted a quarterly lossand gave a weak profit outlook for its fiscal 2009. The two companies are seen as bellwethers of the U.S. economy due to the large volume of commercial and consumer goods they transport.

The warning, which weighed on U.S. stocks, was the latest sign that corporate America could no longer brush off surging energy prices. Crude oil prices have roughly doubled over the past year.

UPS shares dropped $3.06 to $63.20. FedEx was down $1.38, or 1.7 percent, at $78.75. Both companies' shares trade on the New York Stock Exchange.

The Dow Jones transportation index, which also includes airlines and railroads, was down 1.3 percent.

"UPS's preannouncement underscores the growing problems facing parcel carriers," Morgan Stanley analyst William Greene wrote in a note for clients. "The domestic segment, particularly air, has struggled with higher fuel prices, and fundamentals seem to be deteriorating further. However, UPS is also now seeing slowing international volumes for the first time, a key source of growth over the last few years."

After the Atlanta-based company's announcement, Lehman Brothers and R.W. Baird & Co lowered their price targets on UPS's stock, and Baird downgraded the company to "neutral" from "overweight."

"We continue to like the long-term prospects of UPS, but we have grown increasingly concerned about shippers' price elasticity of demand as fuel surcharges for domestic express are hitting record levels for the overall industry," Baird analyst Jon Langenfeld wrote in a note for clients.

Like other major companies in the U.S. transport sector, UPS passes on higher fuel costs to customers. But as BB&T Capital Markets analyst John Barnes wrote in a note to clients, "fuel prices may have reached a tipping point at which many shippers are simply unwilling to pay the higher fuel surcharges.

"We believe both factors may put significant downward pressure on (earnings per share) over the next several quarters." Barnes added.

Late Monday, UPS said it expected to earn between 83 cents and 88 cents per share in the second quarter, down from a previous range of 97 cents to $1.04.

In a statement, the company said U.S. package volume had been lower than expected, while demand for higher-priced air delivery services had seen a particular drop.

UPS also said that the "anemic U.S. economy is negatively impacting volume into the United States, affecting results for the international segment."

In recent quarters, strong international package demand has helped both UPS and FedEx offset lower growth in their domestic services as U.S. economic growth has slowed.

With Tuesday's drop, UPS shares are down 10 percent so far this year, while FedEx is down 12 percent. The transportation index is up 10 percent.