UPS Sees Profit Fall, But Meets Estimates

United Parcel Service Tuesday reported an in-line profit that was hit by fuel costs and a weak U.S. economy, but the package delivery company's shares rose more than 3 percent as analysts said it was performing well despite multiple challenges.

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UPS, considered a bellwether of U.S. economic health like its main rival FedEx , said it expected the second half of 2008 to generate "modestly better results" than the first half.

"In the short term, UPS faces tremendous headwinds in terms of profits thanks to fuel and the U.S. economy, but they are managing through it pretty well," said David Sandell, a portfolio manager at New York-based Leeb Capital Management, which manages assets of around $170 million. Leeb sold off its UPS shares last year but monitors the stock closely.

Sandell said UPS shares represent good value long term and when asked if it was time to invest in them, he said: "It's getting close to that point."

Fuel prices moving forward will play a crucial role in the recovery prospects of both the U.S. economy and UPS, he added.

Atlanta-based UPS reported quarterly net income of $873 million, or 85 cents per share, down from $1.10 billion, or $1.04, a year earlier. Analysts had expected earnings per share of 85 cents, according to Reuters Estimates.

"Slow U.S. economic activity and fuel price increases hit us and our customers during the quarter," Chief Financial Officer Kurt Kuehn said in a statement.

UPS reported revenue of $13.0 billion, up 6.7 percent from $12.2 billion in the second quarter of 2007. Analysts had expected revenue of $12.8 billion. Revenue at UPS's domestic U.S. package service rose to $7.7 billion from $7.6 billion. UPS said it had seen a "more pronounced" shift by customers to cheaper services from premium products.

The company said revenue at its international segment rose to $2.95 billion from $2.5 billion, but results were negatively impacted by fuel and declining U.S. import volumes.

CFO Kuehn told Reuters the company's global business had caused "some concern," but it was too early to tell if weak U.S. economic health would lead to a global slowdown.

"But we are watching the situation closely," he said.

"We continue to favor UPS as a great 2009 and beyond story that is well positioned to begin to expand its core Domestic Package margins for years to come," Edward Wolfe of Wolfe Research wrote in a note for clients.

"There is nothing in UPS report to change our view and we continue to recommend buying UPS aggressively at current levels." UPS said it expects 2008 EPS in a range from $3.50 to $3.70.

Analysts have forecast EPS of $3.61.

UPS said its outlook would translate to a second-half range of $1.78 to &1.98 compared with a first-half performance of $1.72.

On an analyst call, UPS Chief Executive Scott Davis said the company was "making good progress" toward concluding a 10-year agreement with Deutsche Post express unit DHL to haul packages by air for DHL within the United States, and between the United States, Canada and Mexico.

DHL and UPS said in May they were working on a deal.

DHL has struggled to become profitable in the U.S. market, which is dominated by UPS and FedEx.

UPS said in May the deal could generate up to $1 billion in annual revenue.

In a note for clients, R. W. Baird analyst Jon Langenfeld wrote that heading into 2009, UPS would benefit from the DHL agreement, a new contract with the Teamsters union and its share buyback program. But fuel prices remain a major concern.

"Elevated fuel prices could permanently destroy demand in favor of lower priced and less profitably deferred and ground services" Langenfeld wrote. "With limited visibility to fuel prices and the current industry demand destruction from the elevated surcharges, we believe the stock warrants a Neutral rating."

UPS shares rose $2.08, or 3.5 percent, to $61.54 in afternoon New York Stock Exchange trading.