Wednesday, March 07, 2007

UPS Big Future Promise

United Parcel Service (NYSE:UPS) CFO Scott Davis reaffirmed recent guidance at an investor conference in Cologne Germany. Included in the comments was a one sentence forecast for the US economy for 2007

“Davis said domestic small package operations will be affected this year by a slowing economy in the United States, with next-day air growth flat to slightly positive in 2007.”

If you respect Dow Theory tenets that transportation should confirm the Dow be ye afraid or at least sell a few positions.

The real long term news is the fundamental shift in the mix of international vs domestic.

“International profits are expected to be one-third of the total of its operating income in 2010, compared to 24 percent of the total in 2005, Davis said. UPS, also known as United Parcel Service Inc., expects that profits from its U.S. domestic business will represent about 60 percent of its total operating income in 2010, compared to 73 percent in 2005.”

The implicit assumption is a higher margin generated by international business rather than domestic activities. The higher margin will naturally attract competition from alternatives and it remains to be seen if higher margin assumptions hold.

In a global economy many costs become homogenized. Fuel and energy are driven by petroleum prices. Capital equipment such as aircraft and vehicles are usually sourced from only a few large international providers who sell off a global price list. Labor costs will be radically different but unions will move to protect themselves and UPS will need to avoid power struggles. Finally global customers will negotiate global pricing which will negate local differences.

International expansion has been the shiny city on the hill for many companies. Somehow most entities do not make it. If they get there it does not last for long.

Mr. Davis please be careful how you beat that drum!