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UPS on Mend, but Holiday View Unclear

Avondale Partners analyst Donald Broughton is not overly excited about UPS, even though he recently raised his 2010 full-year estimate to $2.30, reflecting global economic improvement. He doesn't much value the company's expectations that it can retain two-thirds of the $1 billion in costs cuts implemented during the past year, adding that FedEx (FDX - Get Report) made $3 billion in cuts and will retain $2.6 billion of that.

"UPS' ability to cut costs is muted because employees are guaranteed a 4.5% increase in wages in its contract with the Teamsters, which prevents UPS from doing what FedEx did, freezing pay for hourly workers," Broughton says. "UPS may be the best manager of unionized employees in the world, but that comes with challenges."

Broughton also maintains that UPS is losing share to FedEx in its ground operations. He says UPS average daily ground volume has declined by 6.2% this year, while FedEx is reporting a 10.1% increase in ground volume during the same period. A big reason, he said, is SmartPost, a product where FedEx and the United States Postal Service partner to deliver high volumes of small packages to individual residences for business customers.

Kuehn has said that SmartPost takes products from the postal service, not from UPS. UPS offers similar products, which spokesman Norman Black said have seen substantial increases this year but are not separately reported. Black said UPS has not lost market share to FedEx in the conventional ground market.

Meanwhile, analyst Helane Becker of Jesup & Lamont rates UPS a buy because "a recovery in 2010 will drive higher earnings." Her price target is $63, or 22 times her estimate for 2010 earnings of $2.84 a share. And Standard & Poor's analyst Jim Corridore estimates 2010 earnings of $2.50 a share. He writes, "UPS is seeing signs of improving business conditions and is effectively cutting costs (and) continues to generate strong free cash flows." His 12-month target is $65.

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