Domestic Package Growth Fuels UPS Results

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UPS: United Parcel Service logo
UPS
United Parcel Service

Quick Take

  • UPS reported strong first quarter results driven by e-commerce growth in the U.S. The company also reaffirmed its full year EPS guidance.
  • While domestic volumes continue to grow led by e-commerce boom, a shift towards premium services will remain the key to yield and profitability growth.
  • International business continued to feel yield pressures due to lighter packages and shift towards non-premium services.
  • Increasing global footprint will help UPS deliver better international growth in the long run.

United Parcel Service (NYSE:UPS) reported adjusted diluted earnings per share (EPS) of $1.04 for the first quarter, up 4% y-o-y. As expected, the company’s results were boosted by continuing strong growth in its domestic package delivery business, led by robust growth in e-commerce retail. In contrast, its International business continued to remain sluggish amid uncertain macroeconomic environment globally.

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See Our Complete Pre-Earnings Analysis: U.S. Domestic Packages Will Help Lift UPS Results

Generating more than $1.4 billion in free cash flow during the first quarter, UPS reaffirmed its full year guidance for adjusted diluted EPS to be in the range of $4.80 to $5.06. [1]

Robust Growth In E-Commerce Continues To Boost U.S. Domestic Package

The UPS Domestic Package division revenues at $8.27 billion grew 3.4% y-o-y while operating profit grew more than 9%, led by 70 basis points margin improvement. Revenue growth was primarily driven by higher volumes as revenue per piece was up marginally by 0.4%. U.S. domestic daily package volume increased 4.4%, led by almost 5% growth in UPS Ground daily volume. Next Day Air and Deferred daily package volumes also grew for the quarter, however, at much slower rates than UPS Ground.

Going forward, we expect the division to continue to see volume growth driven by the e-commerce boom. However, a customer shift towards premium offerings like UPS My Choice and UPS Returns will be the key to improve yields and in turn, profitability. UPS recently expanded the My Choice product to its SurePost deliveries. [2] UPS SurePost leverages U.S. Postal Service’s extensive ground delivery system to provide economic, non-urgent small package delivery services to residential addresses throughout the U.S. Increased flexibility by allowing My Choice members to upgrade UPS SurePost package to UPS Ground for an additional fee not only creates product differentiation, but it also helps the company improve its profitability. Similarly increased adoption of the UPS Returns product that allows businesses to simplify the customer return process and build better customer relationships, will also help UPS to grow in more profitable manner.

Global Recovery Key To International Business

UPS’ International package division revenues were flat at $2.98 billion while adjusted operating profit reduced by more than 4% to $391 million as margins contracted by 70 basis points. Daily export volume increased 3.8% y-o-y to 2.4 million packages driven by Asia (up 8%) and Europe (up 3%). However, revenues remained flat due to lower export yield, down 2.5% on a currency neutral basis. Increasing use of ocean services for heavier, low value per pound packages and the use of non-premium (deferred) air cargo services drove lower revenues per package for the company.

Going forward, we expect the division to continue to remain under pressure through 2013, as there are no clear signs of a faster recovery in the global economy. However, UPS’ growing global footprint will help boost its earnings by tapping fast-growing e-commerce retail and export markets around the world.

During the quarter, UPS launched Access Point in Europe, that is similar to its My Choice product in the U.S., to improve its position in the European e-commerce retail market. Most recently, UPS also completed the acquisition of its partner’s stake in an Express Delivery joint venture in Vietnam, to tap growing exports from the emerging market. [3]

We currently have $85 price estimate for UPS, which is in line with the current market price and will be updated shortly based on the company’s latest earnings release.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. E-Commerce Lifts UPS 1Q Earnings, www.investors.ups.com []
  2. Q1 2013 United Parcel Service, Inc. Earnings Conference Call, www.investors.ups.com []
  3. UPS Becomes First Global Express Delivery Company to Be 100% Owned in Vietnam, www.businesswire.com []