UPS Earnings Preview: Holiday Season Sales, Operational Initiatives To Drive Growth

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UPS: United Parcel Service logo
UPS
United Parcel Service

UPS (NYSE:UPS) is set to announce its Q4 and full year earnings on Tuesday, February 2nd. 2015 was a busy year for the company, between a significant acquisition, a a 10-year deal with Cargojet operational improvement initiatives implemented across the globe. For the first 9 months of 2015, despite reporting flat year-on-year revenues due to adverse currency headwinds and declining fuel surcharge revenues, UPS saw a 36% year-on-year increase in its net income as it managed to improve its operational efficiency. The company consistently beat analyst earnings per share (EPS) estimates for the first three quarters of fiscal 2015.

A successful peak season performance between Thanksgiving and New Year’s Day and operational initiatives implemented should enable UPS to close fiscal 2015 on a strong note. For 2015, the company expects to achieve its full-year guidance of $5.05 to $5.30 per share and anticipates its Q4 operating profit to be consistent with the guidance for full-year operating profit growth of 5%-9%.

We have a $111 price estimate for UPS, which is around 20% ahead of the current market price.

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See Our Complete Analysis of UPS

Holiday Season Sales, Operational Improvements 

In 2014, given the surge in peak season eCommerce volume, UPS was questioned on its ability to handle the seasonal shipments when it recorded a relatively poor performance due to high operating expenses. In light of delivering approximately 630 million packages in the 2015 holiday season, the company adopted a broad strategy aimed at implementing pricing initiatives, adding new capacity and installing technology solutions to effectively adapt to the changing volume levels.

With the continuously changing package sizes in the eCommerce segment, prices were adjusted to encourage optimization, and strategic investments were made towards capacity building. With its acquisition of Coyote Logistics in August, UPS provided customers flexibility with expanded access to omni-channel distribution with 8,000 access points in the U.S. and 20,000 globally, and the reemployment of its control tower significantly optimized its network capacity.

UPS appears to have performed better in Q4 2015 than the prior year quarter, backed by its successful investments and improved operational efficiencies. During the holiday season,  the company hired an extra 90,000- 95,000 drivers and helpers and was able to achieve an on-time delivery rate of 97%, compared to 91% in Q4 2014. ((UPS Peak Season Success, Reuters, Dec 29, 2015))

International Operating Profits Will Grow Despite Macro Weakness

Macroeconomic weakness, driven by a slowdown in China, uncertainty in European markets and FX fluctuations, could provide some headwinds to UPS’ international revenues. However, the aforementioned focus on operational efficiency has helped the company report strong growth in operating profits from the international business in the last three quarters. Despite currency headwinds and lower fuel surcharge, UPS expects its operating profit growth momentum to continue in Q4.

UPS continues to push to improve its network size abroad. In 2015, the company announced its plans to invest over $1 billion in Europe. UPS also plans to double the capacity of its Nuremberg hub in Germany and add two new centers in the Netherlands. These added investments should allow the company to effectively compete with the FedEx-TNT combination. UPS has also added several new markets in Latin America and Europe to its UPS Worldwide Express Freight service.

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