United Parcel Service Inc (UPS), whose performance is a barometer of US commerce, may report the biggest decline in annual profit since 2001 as record fuel costs and a weak economy spur customers to choose cheaper shipping options.
Now is the time to invest, Manning & Napier Advisors Inc said.
“That’s when you want to buy stocks like this, when there’s pessimism,” said Robert Pickels, a senior analyst at Manning & Napier in Fairport, New York, which manages US$18 billion and has been purchasing shares. “It’s a great stock that’s on sale.”
UPS’ airline unit, which handles the most profitable overnight packages, likely experienced a 5 percent drop in second-quarter domestic volume after fuel surcharges reached 28 percent, said Jon Langenfeld, an analyst at Robert W. Baird & Co in Milwaukee.
Atlanta-based UPS blamed jet fuel and the weak economy when lowering its quarterly forecast by as much as 15 percent on June 23.
The company, which releases its results today, could report operating earnings of US$0.85 a share for the three months ended June 30, based on the average estimate of 14 analysts surveyed by Bloomberg.
To keep earnings from sinking faster, Bob Lekites, head of the UPS Airlines division since 1997, is wringing costs from the 264-jet fleet. He sold 17 older aircraft, is putting some weekend packages on trucks and spending US$3,000 per plane to wash engines on Boeing Co 767s to cut fuel use by as much as 5 percent.
Pilots are taking 14 minutes more to fly the 3,185km from Oakland, California, to the hub in Louisville, Kentucky. That saves 250,000 gallons (946,350 liters) of fuel a year, worth US$1 million, Lekites, 54, said in a telephone interview.
“Fuel is on everybody’s mind,” he said. Jet fuel has almost doubled to US$3.85 a gallon in the past year as crude oil reached a record US$147.27 a barrel July 11.”
“Fuel prices definitely are hindering UPS’s shares,” said Mike Morcos, a senior portfolio manager at Aurora, Illinois-based Old Second Wealth Management, which oversees US$1.4 billion, including a UPS stake. “It’s an opportunity to buy a great company with a five-year horizon at a very good entry point. We’re buying it.”
The parcel service may benefit in the coming year from Lekites’ cost savings and an agreement announced on May 28 to handle air shipments for Deutsche Post AG’s DHL unit, which UPS estimates is worth US$1 billion in annual revenue.
A new contract with the Teamsters union, which takes effect next month, will cut pension costs, increase scheduling flexibility and add to profit in 2010, UPS said in December. Air shipments in some markets in Asia and Europe are also posting gains of 10 percent or more, Lekites said.
CEO Scott Davis, 56, a 22-year veteran of UPS and former chief financial officer, succeeded Mike Eskew, 59, on Jan. 1. Since then the shares have fallen 14 percent to US$60.81 in New York Stock Exchange composite trading on Friday after reaching a five-year low of US$56.44 on July 15.
UPS may rise 25 percent to US$76 in the next 12 months, based on the average estimate from 11 analysts surveyed. Nine out of 19 who follow the stock recommend buying and 10 say hold. o hold.
The company is considered “a good indicator of the overall economy,” said Scott Brown, a senior economist at Raymond James & Associates in St Petersburg, Florida.
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