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Old 07-25-2006, 09:20 AM   #1  
Freighter Captain
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Default UPS shares fall 14%

UPS Profit Misses Estimates; Shares Fall on Outlook (Update7)

July 25 (Bloomberg) -- United Parcel Service Inc., the world's biggest package shipping company, said second-quarter profit rose less than analysts' estimates and reduced its forecast as international margins fell, sending the shares to their biggest one-day drop ever.

Net income increased 7.6 percent to $1.06 billion, or 97 cents a share, from $986 million, or 88 cents, a year earlier, UPS said today in a statement. UPS forecast third-quarter profit of 87 cents to 91 cents a share, trailing analysts' 97-cent average estimate in a Thomson Financial survey. UPS also said it would buy back $2 billion more of its shares.

Rising fuel costs eroded international margins, to 18.5 percent from 19.9 percent, affecting the fastest-growing business segment at UPS. Atlanta-based UPS and rival FedEx Corp. benefited from overseas shipments as global economic expansion drove freight demand. Sales rose 15 percent to $11.7 billion.

``I can't find anything to get excited about,'' said analyst Andrew Meister of Thrivent Financial for Lutherans in Appleton, Wisconsin, holder of 526,300 shares as of March. ``They missed Street estimates and lowered expectations. It looks like inflationary pressures are cutting into their profit margins.''

UPS's forecast also damped other U.S. stocks as investors interpreted the outlook as a signal that economic growth may be slowing. ``While it is likely an opinion stemming from UPS's current business trends, it sounded like a harbinger for softer numbers,'' Meister said.

Shares Fall

Shares of UPS fell $11.59, or 14 percent, to $68.41 at 12:07 p.m. in New York Stock Exchange composite trading. FedEx shares fell $3.13, or 2.8 percent, to $107.31. The biggest one-day drop in UPS shares was 8.7 percent in April 2000. UPS held its initial public offering in November 1999.

Second-quarter profit at UPS had been estimated at $1 a share by Jon Langenfeld, a Robert W. Baird & Co. analyst ranked by StarMine Corp. as the most accurate for UPS. That also was the average of 15 analysts in a Thomson Financial survey.

``There is strong downward pressure on international margins,'' said Donald Broughton, a St. Louis-based A.G. Edwards analyst who rates UPS shares ``hold'' and doesn't own them. ``Estimates are going to come down, and the stock is going to come down as well.''

In January, UPS said it expected second-quarter profit would be 97 cents to $1.01 a share. The company also forecast earnings per share for all of 2006 to increase 11 percent to 16 percent, or a range of $3.85 to $4.03. Today, UPS said the full- year profit would be ``at the low end'' of that guidance.

``It looks like expense control was an issue last quarter,'' Broughton said. ``I suspect it will be again this quarter.''

Margin Improvement

Chief Financial Officer Scott Davis said in an interview that higher jet and diesel fuel expense cut profit by $25 million as those costs rose faster than the company anticipated.

UPS expects ``excellent operating profit growth'' in the international package business during the third quarter, with margin improvement from the second quarter, Davis said on a conference call. He didn't say how much.

Domestic business will have a ``minimal increase'' from last year's third quarter, because rail, health care, pension and fuel costs are rising, Davis said.

UPS expects the U.S. economy to ``moderate,'' with a ``slight impact'' on the company's results, Davis said.

`Real-Time Indicator'

``We are a very good real-time indicator of the economy,'' Davis said in the interview. ``We are not a good leading indicator. In today's just-in-time world, people just don't stock inventory.''

U.S. business accounted for $1.1 billion of UPS's $1.5 billion in profit before interest and taxes in the third quarter of 2005. The international segment contributed $318 million. Net income for the quarter last year was $953 million, or 86 cents a share.

Domestic package revenue, UPS's largest unit by sales, rose 7.5 percent, helped by a margin increase to 16.5 percent from 16.1 percent. Average daily volume rose to 13.3 million packages, a 4.7 percent increase.

Profit in the unit that manages and hauls freight shipments rose 38 percent to $47 million as sales rose 63 percent to $2.04 billion. Profit margin growth lagged behind the revenue increase because of costs to integrate an air freight unit bought last year.

International Growth

International package revenue rose 11 percent to $2.23 billion in the second quarter. Package volume growth slowed to 12 percent from 29 percent in the first three months of the year. Three fewer operating days in Europe hurt the results, UPS said.

``The global small package market continues to expand,'' Chief Executive Officer Mike Eskew said in the statement.

International operating profit climbed 4.3 percent to $414 million. That trailed growth of 13.5 percent in the first quarter and 30 percent for 2005. For the third quarter, profit growth from international shipments will exceed the 8.6 percent rate for the first half of 2006, Davis said.

Davis said the company still expects 30 percent revenue growth this year in China, where UPS and others are expanding operations by adding flights.

UPS's lowered forecast ``is a reflection of both ongoing cost pressures and more muted volume expectations,'' said Thomas Wadewitz, a New York-based analyst for J.P. Morgan Securities Inc.

Higher fuel bills, delays in fuel surcharge recoveries and rising repair costs pushed up operating costs by 16.2 percent, Wadewitz said, more than his 14.4 percent estimate.

Today's buyback announcement comes 21 months after the UPS board approved a $2 billion share-repurchase program. The new program would pay for 25 million shares, based on yesterday's closing price. UPS has 1.1 billion shares outstanding.
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