UPS Earnings Preview: Strategic Investments Abroad And Key Acquisitions Could Drive Earnings

United Parcel Service (NYSE:UPS) is set to release earnings for Q3 2015 on October 27. The company has performed consistently well since Q3 2014, with each quarter’s EPS either meeting or exceeding analyst estimates. Even last quarter, the company recorded an EPS of $1.35, which was $0.09 more than the analyst consensus of $1.26. ^[1] Given UPS’s short-term track record and improving delivery strategies, it seems plausible that the company could see good numbers this quarter, as well. The analyst estimate for EPS for this quarter is set at $1.37. ^[2]

See Our Complete Analysis of UPS

Positive Momentum In International Segments:

UPS continues to push for improving its network size abroad. Last quarter, the international segment recorded an increase in operating profit by almost 17%. The company’s strategy is to create added demand by increasing investments and improving operational efficiency.

In terms of investments, the courier giant has announced plans to invest about $1.06 billion in Europe. Last quarter, the company declared that it is doubling the capacity of its Nuremberg hub in Germany. This automated facility is ideally located to link Eastern and Western trade lanes. This investment greatly improves UPS’s network in Europe, as well as bolsters the efficiency of its already established delivery process. Apart from this, UPS has also decided to add about 1,400 trucks to its delivery network. Furthermore, the company is anticipating to improve the fuel efficiency of its trucks, by buying 319 CNG fuel systems from Quantum Fuel System Technologies. To help aid this expansion, UPS is going to open 15 new CNG fueling stations. ((UPS to Invest $1.06 Billion in Europe, bidnessetc.com)) The company also plans on adding two new centers in the Netherlands, to broaden its Healthcare network. This move will increase capacity, while simplifying customer access to UPS’s global network. Given the added investments, and the positive growth forecasts for the EU, it seems like the company is well on its way to compete efficiently with the FedEx-TNT threat that looms just around the corner.

In keeping with its growth strategies, UPS has added five emerging markets in Latin America and three in Europe to its UPS Worldwide Express Freight service. This too, seems to be a good move considering TNT’s presence in Latin America. In Asia, the company implemented several enhancements to improve coverage and service speeds. These enhancements enabled UPS to accelerate intra-Asia transit times by up to one full day. This move is essential to help the Seattle-based company capitalize on the fast growing intra-Asian market.

Despite the slowdown in China (a market where UPS has considerable exposure to the import-export business), business was up 5-6% in Q2 there, as the company continues to focus on the middle market. It is estimated that business in China will continue to grow, primarily due to the import-export and Supply Chain and Forwarding segments. However, since Q2, there have been unfavorable developments in the country (devaluing the renminbi and cutting of interest rates), which could adversely impact UPS’s business there.

New Acquisitions:

In keeping with its strategy to improve its delivery network and supply chain, UPS is making some key acquisitions. The biggest acquisition of the year to date is that of Coyote Logistics for $1.8 billion. The Chicago-based company aims to provide short-term trucking solutions to shipping companies, utilizing its network of 35,000 pre-qualified local, regional, and national carriers. The company had created software for UPS in the past to increase efficiency during the holiday season. Better technology brought in by this deal will help improve fleet utilization. According to UPS, the increased efficiency could add about $150 million to the bottom line in the coming year.

Recently, the company also purchased Parcel Pro and Integrated Parcel Service which is supposed to help enhance UPS’s global small package network for secure shipment and insurance solutions for high value goods in Europe, Asia, and the U.S.

Another acquisition by the company was that of Kiala. The company has refined and improved its unique e-commerce delivery solution and launched it globally as the UPS access point.

All said and done, UPS is working hard to overcome supply chain obstacles and competition with their growth plans that have shown some success to date. The company has projected growth for the year to be between 6-12% and given the way things are, it seems very achievable. However, if UPS cannot find a way to satisfy its pilots (the union recently voted to authorize a strike as talks move into its fifth year), especially around the looming holiday season, we could be looking at a completely different story in the quarters to come. Despite the threat of a strike though, the company has maintained that they look after their pilots well and that the strike is merely a “common union tactic.” ^[3]

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More Trefis Research

1. UPS Q2 15 Earning’s Call Transcript, www.seekingalpha.com [↩]
2. UPS Earnings Will Deliver The Goods, www.investorplace.com [↩]
3. UPS Pilots Union Votes to Authorize Strike, www.wsj.com [↩]