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United Parcel Service, Inc. (UPS), FedEx Corporation (FDX): Is There Any Spice in the Airfreight Sector?

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No airfreight stock has been able to beat the market since the start of this year. United Parcel Service, Inc. (NYSE:UPS) has seen the most appreciation of 18%, which is less than S&P 500 (INDEXSP:.INX)’s +20% performance for the year. This performance has not come as a surprise. Airfreight trends have decelerated throughout 2Q13, with particular weakness noted within the Asia region and on Asia-to-Europe trade routes.

Most recently, PACTL reported a 2.4% decline in international traffic in June and HACTL reported a 7.0% year-over-year decline in total throughput. PACTL is Shanghai’s Pudong International Airport Cargo Limited, while HACTl is the same institution in Hong Kong which announces data related to air-freight demand and trends. A decline in these numbers implies some risk to top-line revenue growth for the airfreight companies.

Let’s have a look at some of the airfreight companies:

High exposure to Asia

As already mentioned, the recent retracement in intra-Asia traffic raises the risk of modest top-line disappointment. Hence, the Street has recently been bearish on Expeditors International of Washington (NASDAQ:EXPD) given its significant exposure to Asia trade flows. Expeditors International of Washington (NASDAQ:EXPD) is viewed as a bet on global trade, which will remain lackluster in the near term. The degree to which the company participates in an international freight rebound is uncertain following significant under-performance in recent quarters.

Furthermore, long-term structural trends (e.g., changing freight flows, miniaturization, near-shoring, increased price transparency) do not support a constructive view on a rebound in earnings growth at Expeditors International of Washington (NASDAQ:EXPD). Investors will also look toward commentary from management on the outlook for the second half of the year after the company expressed ‘cause for optimism’ along with its 1Q13 earnings results.

Best run asset-based freight company

United Parcel Service, Inc. (NYSE:UPS)Morgan Stanley (NYSE:MS) believes United Parcel Service, Inc. (NYSE:UPS) to be one of the best run asset-based companies that it covers; However, after failing to acquire TNT, United Parcel Service, Inc. (NYSE:UPS) is left pursuing a less-than-exciting growth story focused on tuck-ins and share buybacks. Furthermore, while the company has exposure to a broad global recovery in trade and airfreight, it is less levered to those trends than its closest competitor, FedEx Corporation (NYSE:FDX).

Outside of an unexpectedly robust macro environment, there seems to be little reason for multiple expansion. Weakness in macro trends was properly communicated by United Parcel Service, Inc. (NYSE:UPS) in a press release on July 12, when the company expressed that it expects EPS to come in at $1.13 during Q2, below the consensus estimate of $1.20. Guidance for FY13 EPS is cut to a range of $4.65 to $4.85 versus the $4.98 consensus. The company cited slowing package volume growth due to labor negotiations on top of the general sluggishness it’s seeing with the industrial economy.

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