Shippers feeling oil price pinch
FEDEX, UPS NEAR LOWS FedEx may face more pressure after profit report today
For package shippers
FedEx Corp. and United Parcel Service Inc., it’s all about oil now.
With crude and gasoline prices flirting with record levels, bellwether transport stocks like FedEx and UPS have been hit particularly hard as investors fret over higher shipping costs, diminished profits and a potential economic slowdown.
In fact, FedEx (FDX/NYSE)
and UPS (UPS/NYSE)
are now trading near their 52-week lows. And FedEx shares could face more pressure after the company reports earnings today.
Nevertheless, analysts haven’t changed their ratings since Hurricane Katrina devastated the Gulf Coast, sending gasoline and jet fuel prices higher: it’s too soon to gauge the full fallout from this year’s busy and still-active hurricane season. But they remain split.
Analyst Jon Langenfeld at Baird US Equity Research said he’s bullish on the shippers, with outperform ratings. Both companies have good prospects for long-term international growth, with the outlook at Baird for the U.S. economy to remain “solid.”
The more bearish analysts think the share prices are fairly valued, based on modest U. S. shipping-volume growth and the higher fuel costs.
The mean estimate for analysts reporting to Thomson First Call is for 22% earnings growth this year at UPS to US$3.46 a share and 11% growth at FedEx to US$5.30 a share. FedEx warned last month that 2005 earnings would be below consensus views then of US$5.48 a share.
While UPS and FedEx are almost the same size (annual revenue of more than US$36-billion and nearly US$30-billion, respectively) UPS has the bigger ground shipping business, and FedEx has been more of an air shipper.
Both companies have seen a slowdown in ground-shipping growth this year, partly due to strong competition from an unlikely source — the US Postal Service Priority Mail service, said transportation analyst Ken Hoexter at Merrill Lynch.
According to analysts, UPS has a 50% share of U.S. ground shipping market, with FedEx and USPS at around 13%. DHL Worldwide Express Inc., a unit of Germany’s Deutsche Post AG, is just breaking into the U.S. market, with about a 1% share of ground shipping business.
In the air, FedEx and UPS each have an estimated market share of more than 40%, with DHL about 12%. The fleets at UPS and FedEx are as big as those of major passenger airlines.
But unlike struggling passenger carriers, air shippers continue to make a profit. Skyrocketing jet fuel prices — up 60% this year even before Katrina knocked out a number of oil refineries — get passed on to customers. Fuel surcharges lag oil price hikes by a couple of months, so shippers can’t recoup rising costs right away.
Susan Rosenberg, a UPS spokeswoman, said her company has found ways to cut fuel consumption, such as rescheduling flights to fly at slower speeds or changing air routes.
Analyst James Valentine at Morgan Stanley said air fuel surcharges, in the range of 12.5% to 15%, compared with 3% ground surcharges, will likely shift some air parcel demand to the ground, “negatively impacting FDX more than UPS.”
Both companies’ bottom lines are benefiting this year from cost-cutting, and the companies are now in contract negotiations, with UPS pilots voting early this month to authorize a strike.
The shipping companies would like to slash labour costs the way the airlines have, but as long as shippers continue to make money, it’s unlikely that pilots would agree to make concessions, said airline consultant Bob Mann of RW Mann & Co.
The international package shipping market is the big growth story for UPS and FedEx. UPS has an early advantage in China, Mann said, with an agreement that allows it to offer express package service to much of the country, with the first largescale, privately owned operation. The company said it won’t see the material impact of business in China this year.
DHL now is a small player in the U.S. But the company, which two years ago bought U. S. air shipper Airborne Express, is expanding its airline hubs and beefing up its marketing plans to reach more business customers.
“DHL is absolutely a serious competitor,” said Baird’s Mr. Langenfeld. Parent Deutsche Post on Monday said it would buy British logistics company Exel PLC for US$6.7-billion, making DHL the biggest global logistics company.
“We don’t see DHL taking significantly more U. S. market share in the next year or two,” Mr. Langenfeld said, since expansion is expensive and will take some time. But he said, over the long haul, DHL could rival the Big Two.
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