UPS and FedEx Pick Up Momentum as Economy Rebounds

In the wake of strong earnings and a recovery-fueled boost in shipments, there are more bulls chasing after United Parcel Service (NYSE: UPS ) and FedEx (NYSE: FDX ) these days than you'd find at the encierro in Pamplona. But despite the positive outlook, FedEx and UPS still will have to navigate the uncertainty of increasingly expensive fuel and an antitrust lawsuit to ensure that share prices don't get gored in 2011. It's no secret that both transport companies' earnings have risen dramatically since last July as the strengthening economy boosted shipments of goods.  As the economy continues to dig out of the recession, investors are likely to see significant upside potential with both companies' shares in 2011 — even though UPS and FedEx stock already has risen by 26% and 12% respectively over the past year. Analysts agree that UPS and FedEx likely will have a good year in 2011. UPS is forecasting record earnings of as much as $4.35 a share, which if achieved would be 22% above last year's numbers.  FedEx, meanwhile, also is looking at higher earnings in the range of $4.80-5.25 for 2011. Both companies have been able to increase earnings, even as volatile oil prices bedevil the bottom lines of airlines and others.  This is because in the profitable and time-critical parcel-shipping segment, domestic customers have few reasonable alternatives that can deliver in their tight time windows. As a result, UPS and FedEx have been able to raise rates and add surcharges to offset increased fuel costs. Last week, UPS announced fourth quarter earnings per share of $1.08, beating analysts' estimates with a 44% increase over the same quarter in 2009.  For the full year 2010, the company's EPS surged by 54% to $3.56. UPS announced plans to increase quarterly cash dividends to 52 cents per share up from 47 cents, payable on March 2.  The company attributed its gains to increases in package revenue – particularly in European shipments.  The company's supply chain and freight operations also posted strong gains. Although FedEx earnings for the quarter ending November 30 came in at 89 cents/share 18% below the same quarter in 2009, its revenue improved by 12% year-over-year.  The company's operating costs surged by 14% over the same quarter in 2009 to $9.16 billion.  The culprits: the cost of merging its freight and less-than-truckload (LTL) operations, higher expenditures on fuel and maintenance, and placing $66 million into a legal reserve to cover damages in a breach-of-contract lawsuit won by the defunct ASA Airlines last October.  The company will appeal the ruling.  FedEx will release its fiscal 2011 third quarter earnings on March 17. UPS and FedEx have benefited from the exit of DHL Express from the U.S. parcel market in January 2009.  John Mullen, global CEO of DHL Express, argued at the time that his company's five-year, $10 billion experiment to break into the U.S. market failed because the "market is a highly concentrated duopoly." FedEx and UPS take issue with that assessment, of course.  But whether their U.S. market dominance actually fits the definition of a duopoly under federal antitrust law is an issue the courts may wind up deciding. California-based AFMS Logistics Management Group has filed a federal lawsuit against both companies alleging antitrust violations. Both companies in October 2009 barred their customers from using third-party consultants like AFMS in parcel rate negotiations. In January 2011, the Department of Justice (DOJ) got into the act, kicking off an investigation into collusion by the two competitors.  UPS and FedEx separately announced that they acted unilaterally in their best interests and in that of their customers by outlawing third-party consultants. Bottom Line: Worst case scenario, there is a wide gulf separating a lawsuit (or even a DOJ investigation) from any action that can impact earnings directly  – and that distance often is measured in years.  Still, any attention from DOJ's Antitrust Division is worth at least a momentary pause – ask American Express (NYSE: AXP ).  The financial services firm's higher fourth quarter 2010 revenue report was dampened by worries about Justice's antitrust suit over the bank card issuer's merchant processing rules. As of this writing, Susan J. Aluise did not own a stake in any of the companies listed here.
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