UPS Earnings: Strong Performance Driven by Peak Season Success

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UPS: United Parcel Service logo
UPS
United Parcel Service

It has been an interesting year for UPS (NYSE:UPS). Its ongoing operating initiatives helped the company beat earnings per share (EPS) expectations for the first three quarters of 2015, and Q4 was no different. At $1.56, UPS saw a 26% year-on-year increase in diluted EPS, beating analyst consensus of $1.47. Even though UPS’s top line remained stressed on account of strong currency headwinds and lower fuel surcharges, the company demonstrated strong operating profit growth in all three of its segments (US Domestic Package, International Package, and Supply chain and Freight). For full year 2015, UPS reported a 1% increase in revenue compared to 2014, but at $5.43, its diluted EPS came in at an all time high. ((Read Earnings Press Release, February 2nd, 2016))

Learning from its issues handling peak season sales in Q4 2014, UPS was well prepared to deal with heavy volumes during the holiday season this time around. The company adopted a broad strategy, which included implementation of pricing initiatives such as dimensional weight charges, capacity investments to ensure network optimization and technology solutions such as broadening the installation of its ORION software. These initiatives helped UPS drive record operating profit growth in Q4 2015. The company’s operating profit grew by 54.3% on a year-on-year basis.

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Operational Improvements Drive Profits

  • U.S. Domestic Package– Due to the shifts in the demand landscape, with B2C outpacing the B2B sector, eCommerce continued to drive demand in Q4. This growth was, however, slightly offset by the lower fuel surcharges and currency headwinds, leading to 2.6% growth. The strong execution of operational initiatives and network investments led to productivity gains, which in turn led to a solid 18% year-on-year jump in the segment’s operating profit.
  • International Segment– Network management improvements and rate actions led to an operating profit of $624 million in Q4 2015. The revenue growth in this segment was mostly driven by demand from Europe, while the aforementioned initiatives significantly contributed to the segment’s bottom line.
  • Supply Chain & Freight– As a result of the Coyote acquisition in August 2015, this segment’s revenue growth was at 6%. However, the organic revenue growth rate declined due the continuation of UPS’ revenue management actions. [1]

Core Performance To Remain Strong In 2016

UPS projects fiscal 2016 to be another solid year. Looking closely at the segments, the company expects the domestic segment’s average daily volume to drive revenue up by 4-6% and operating profits by 5-9%. In the international segment, UPS projects a 2-4% increase in shipments per day, which can drive revenue growth at a similar pace. The reasons behind the relatively modest top line guidance are the operational improvement initiatives taken by the company and an anticipated drag from non-hedged currencies and lower fuel surcharges. In the Supply Chain & Freight segment, the positive sentiment continues with revenues from Coyote being included for the full year. The company has guided the segment’s top line growth at 15-20% for fiscal 2016, with organic revenue growth likely landing between 3% and 5%.

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Notes:
  1. www.seekingalpha.com, UPS Q4’15 Transcript []