Logistics company UPS (NYSE:UPS) posted third quarter results on October 25 that signaled a revival in business performance over the previous quarters. The company’s top line grew at a faster pace at 3.4%, compared to 1.2% in Q2 and 2.3% in Q1. The faster growth in revenues was driven by a 5% hike in U.S. domestic package revenues and a 2.5% rise in international revenues. Operating and net income margins continued to improve sequentially, benefiting from lower compensation and reduced fuel surcharges, which were partially offset by an increase in tax expense. Strengthening demand for delivery services globally, combined with prudent cost reductions supported UPS’ 9.4% y-o-y growth in adjusted earnings per share for the quarter.
Weak Currencies Boost International Package Volumes But Yields Decline
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The International segment represents about 29% of UPS’ valuation according to our estimates, and is an integral part of UPS’ core business. In the recent Q3 results, international operations continued to gain momentum for the company. Revenues from this division increased 2.5%, with a 6.5% increase in volumes, which were offset by a 5.2% reduction in overall yields. In comparison, prior quarters of Q2 and Q1 had lower volume growth rates of 5% and 1.8%.
The international exports segment, which represents about 74% of the international division’s revenues continued to have a mixed business performance. Volumes inched 6.7% higher due to increased activity along trade lanes connecting Asia, Latin America and Europe and bolstered by weak currencies. However, the increase in export volumes was offset by a 6.9% reduction in yield, restricting overall revenue growth from the international export division to 0.9%. International domestic business’ revenue increased 8.8% this quarter due to a 6.3% increase in package volume and a favorable 0.7% increase in revenue yield. Key growth markets of Poland and Turkey enjoyed an approximately 20% increase in volume bookings.
The reduction in yield seen in the international business is a result of weak customer spending, leading to increased migration to cheaper transportation modes and trade lane mixes, which continues to plague the logistics and transportation industry. Although the export industry in international geographies is seeing an upswing in terms of volumes due to the strong currency volatility, the continuing shift in consumer preferences to less expensive and deferred logistics’ services over express air freight services is limiting the upside potential for the international logistics industry. We are, however, optimistic about the long term prospects of UPS’ international export business as consumer confidence begins to strengthen following a gradual recovery in currencies and economies in emerging markets.
U.S. Ground Package Services To Get Support From Rise In E-Commerce This Holiday Season
The U.S. domestic business, which represents close to 60% of our UPS valuation, demonstrated a comeback in the quarter with an increase in volumes transported and revenue yields. Average daily volumes picked up pace after a dip in the second quarter of fiscal 2013, reaching 13.5 million. UPS’ ground segment continued to be the company’s forte, with 84% of overall daily volumes being serviced through offerings such as UPS Surepost, UPS Ground, UPS Ground with Freight Pricing and UPS Smart Pickup.
UPS anticipates robust sales from e-commerce portals this holiday season, which translates into increased shipping of products for the company. The holiday season in 2013 is 26 days long, 6 days short of last year’s season, making it the most compressed period since 2002.  The company expects delivery volumes to be as high as 34 million packages at the peak of holiday season buying and is gearing up to meet demand surges this season by intending to hire 55,000 seasonal workers to support its ground operations.  Although online retailer eBay (NASDAQ:EBAY) recently guided to tread the holiday season with caution due to concerns in the U.S. economy, the very fact that the global e-commerce market is witnessing explosive sales growth mitigates risk factors associated with the industry. We believe e-commerce in the U.S. is poised for healthy long term growth, which should support robust growth for UPS’ domestic business in the coming quarter.
We are in the process of revising our price estimate of $88 for UPS after the company files its results with the SEC.Notes:
- UPS Holiday Pick-Ups to Exceed 34 Million Packages on Peak Day, UPS Investor Relations, October 25 [↩] [↩]