Monday, June 23, 2008

UPS: The Next Oil Victim

Trading of the United Parcel Service, Inc. (UPS) was halted today after hours until about 4:55 PM EST (T3) as they warned on Q2 earnings, citing, you guessed it, rising oil prices and package volume:

Old guidance range: $0.97 to $1.04 per share
New guidance range: $0.83 to $0.87 per share

UPS has plenty of concerns with the obvious. But, along with FedEx, international demand seems to be holding serve. In fact, UPS is an official sponsor of the 2008 Beijing Olympic Games and has been serving China since 1988 with non-stop flights. Just spit-balling here, but perhaps the international goodwill and global media presence this August can help enhance their full year earnings.

As an investor, though, there is not much to do besides sit on the sidelines. The dividend doesn’t merit the risk involved in holding companies affected by oil to this extent. Airlines are a better hedge against lower oil prices. Recent history shows, you’ll see a larger total percentage return on low per-share stocks like UAL Corp (UAL) and U.S. Airways (LCC)- that is- if you can muster up the courage to take the bearish position for short-term oil. The airline sector and the United States Oil Fund ETF (USO) have been trading inversely for a while now. For the risk takers, perfect timing could net some nice profits.

Obviously, management knew they would take a hit to the per share price after seeing FedEx (FDX) warn about their quarter and full-year earnings just a week ago. Perhaps the folks at UPS figure it is better to follow in their peer’s footsteps and take the hit now, rather than hugely disappointing come their expected reporting date in July.

Moreover, UPS took a dive on FedEx’s lowered guidance – so some of this news was certainly priced in the stock. Shares ended the after-hours trading session down $2.30 to $63.96, nearly a 3.50% move. Expect the gap just a bit lower tomorrow.

Disclosure: none

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