United Parcel Service (UPS)

For decades UPS management has enjoyed better compensation packages than its competitors--or even management in other industries--but after the 1999 IPO, management has increasingly lost the "culture of ownership" that dominated the company since its founding: after the Enron collapse many in management are reluctant to hold their UPS stock to retirement, as the company encourages. With fewer incentives to stay with UPS, management will bleed to other industries, leaving the remaining management of the company weakened.

United Parcel Service Inc (UPS) warned that its second-quarter outlook would likely fall below analysts’ expectations and reported lower-than-expected profit as fewer packages shipped amid the global economic downturn, sending its shares down as much as 7.5% yesterday (Thursday), Reuters reported. The U.S. economic bellwether and said that while the economic recovery could begin as soon as the end of this year, it would more likely come in 2010.

lots of cost cutting means more packages will not get to the customer when they are suppose to. Lots of cost cutting means even more of a work load on remaining employes not to mention faded uniforms and even dirtier trucks

It seems a combination of streamlining the company, to make sure they will run smoother and efficiently, and newer equipment, which require fewer stops and less maintenance overall are the real culprits of this lay off. UPS might be streamlining too much to the point of downsizing.

Most of the over the age of 60 are keeping their jobs, so they can keep retirement privileges they earned working for the company. When they retire, UPS will need to find newer pilots. The majority of the pilots will retire around the same time, so UPS might face a sudden scarcity of pilots.

Labor and fuel costs continue to hamper the company's bottom line (fuel costs represent only 5-7% of operating expenses each year, too little to be a driver of growth or share price). There is a bright side: UPS is a large investor in alternative fuel vehicle research, and problems with Teamster mismanagement of pensions has left the union with few chips at the bargaining table. Despite this, UPS's fleet will remain gasoline-powered for the foreseeable future and the Teamster union will continue to push labor costs upward.

UPS hasn't made a public pronouncement yet about lower quarterly profit expectations (as opposed to FedEx, which did make an announcement like that on May 12th) and the average quarterly earnings estimate of analysts that follow the company is presently in the range of $0.96 to $1.05 per share this quarter. On an annual basis, UPS is expected to earn around $4.07 per share this year (2008 average estimate of 18 analysts) although this number has been reduced lately from a target of $4.44 per share ninety days ago. Next year's estimates (2009's) have also been cut from a level of nearly $5.00 per share to a standing $4.64 average expectation now. We think there's more downside to these estimates.

Y-O-Y growth in top line sales estimates appears to be around 6% to 7% on UPS current revenue run rate of approximately $52 billion in sales per year. Like FDX, we think that while showing an increase over 2008's fiscal year results, UPS will struggle to maintain its profits or even show profit growth in an environment of such sharply rising fuel costs. We are convinced that margins are going to be compressed in this industry, even if UPS or its competitors try to pass on the costs to consumers with fuel surcharges.

UPS faces increased competition in its core U.S. market and emerging European market from DHL. While diversifying the company through acquisitions gives it leverage in the expanding global market, it has frequently come at the expense of the quality of the U.S. market that drives its profits.