Airline Pilot Central Forums - Fed Ex and UPS hit 52 week lows

NEW YORK - Are high fuel costs set to ground FedEx and UPS? Probably not, though investors may want to fasten their seat belts for a bit of turbulence.

Both overnight delivery giants have seen their share prices tank for most of this year, as $60-per-barrel oil has spooked some on Wall Street concerned about their near-term profit outlook. Now FedEx (nyse: FDX - news - people ) is set to report its latest quarterly profit on Sept. 21, which should give investors an even better insight into the health of the company and its industry.

"It is beginning to impact demand," says analyst Jim Corridor of Standard & Poor's. He explains that newly budget-conscious customers are beginning to cut back on one- and two-day shipping as prices crawl up. Even though higher gas prices make driving to stores more expensive, quick shipping is often a luxury that people can do without in some cases.

FedEx and UPS (nyse: UPS - news - people ) have built their business models on the premise that they could pass along fuel-cost increases to their customers in the form of a surcharge. That's been mostly successful this year in keeping revenue moving in tandem with expenses. But firms so heavily reliant on fuel to power their fleets of planes and trucks are bound to hit a wall when oil prices continue to rise for months on end.

Many analysts look at overnight shippers, like FedEx and UPS, as key economic bellwethers, since demand by businesses for overnight delivery service tends to pick up when the economy is rolling. Both companies have enjoyed a good ride during the economic recovery, raising revenue each year since 2002.

But, Corridor says, oil costs are reaching the point where business and individual customers are starting to push back.

That's why most of Wall Street currently carries just a "neutral" rating on FedEx stock, even while expressing confidence in the long-term picture. Jason Seidel of Credit Suisse First Boston set a target price of $95 per share--a 19% increase from its current level--for late 2006. But in his latest report, he acknowledges that fuel costs present a risk to that target.

Both UPS and FedEx shares were trading just above their 52-week lows on Sept. 16--a steady dip that's come on the heels of a strong run over the previous 12 months.

Analysts' consensus calls for FedEx to earn $1.18 per share for the August quarter on $7.6 billion in revenue, up from $1.08 per share and $7 billion for the same quarter a year ago. The key, though, is whether the guidance the company is likely to issue on Wednesday for its future prospects will reflect lowered expectations based on fuel costs. Just last month, FedEx predicted it would earn less than the $5.48 for 2006 that analysts had forecast. The new range is between $5.20 and $5.45 per share.

"We remain a bit hesitant on the stock in light of current market conditions, higher fuel costs and labor issues," CSFB's Seidel says in his report.

Seidel is more bullish on the company over the long term, touting its plan to quickly get operations up to speed in several of the world's developing economies, like India and China. Also, FedEx recently purchased a half-dozen Airbus freight aircrafts for 2007 delivery.

S&P's Corridor agrees, calling FedEx's growing volumes out of China "extraordinary." He also noted that recently bankrupt is likely to cut back on its own cargo shipping business, presenting incremental opportunities for both FedEx and its chief rival, UPS.

The business models of the two companies have largely converged in recent years, with UPS building up its air fleet and FedEx boosting its ground transport. That puts both in a position to capitalize on the growing Asian market, competing toe-to-toe in both long and short routes while also being equally vulnerable to fuel cost increases.

FedEx still holds the stronger position for the moment, since UPS is currently dealing with a labor dispute with its pilots that's now in mediation. And those business clients that plan shipments in advance want to know that planes will be flying.

"Customers may feel they have to protect their future orders," Corridor said.