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Labor and fuel costs continue to hamper the company's bottom line

Labor and fuel costs continue to hamper the company's bottom line. 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.