UPS Lowers Its Outlook On Shifting Industry Dynamics

Persistent weakness in the global courier industry hurt United Parcel Services‘ (NYSE:UPS) second quarter earnings. Total revenues grew at a meager 1.2% to $13.5 billion, helped by the U.S. domestic package segment. Net income stood at $1.13 vs $1.15 in the previous year quarter. UPS had already announced its expected earnings last week to prepare the market for tepid set of numbers. For the full year, UPS now expects a net income of $4.65 to $4.85 per share from prior expectations of $4.80 to $5.06. ^[1]

Companies across the world are implementing cost-cutting measures and no longer spending as they did before the 2008 crash. Moreover, a decade of high fuel prices has resulted in deliveries getting more expensive. As a result, the clients are ready to wait for longer and therefore prefer the slower and cheaper modes of delivery.

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Margins Steady

Margins declined slightly although most of it was attributable to the restructuring expenses incurred by the company for its international operations. UPS hopes to better align itself to the shifting dynamics in the courier and delivery industry through restructuring. The company reported operating margins were down 50 basis points to 12.9%.

In the U.S., a customer shift towards premium offerings like UPS My Choice and UPS Returns will be the key to improving yields (or the revenue/package) and in turn, profitability. UPS recently expanded the My Choice product to its SurePost deliveries. 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.

UPS’ domestic operations constitute 60% of the stock price. The demand for courier services in the country is seeing a growth due to a boom in e-commerce shipments. UPS’ domestic volume rose 1.9% in the quarter.

Other Focus Areas

International volumes are rising, but the average revenue per shipment is declining mainly due to a preference for the cheaper options. Besides focusing on traditional delivery services, the company is also looking to enhance its presence in shipping related to healthcare products.

Shipping medical devices and equipment is a niche service and requires specialized handling. As a result, shipping companies can often charge a premium for such services. During the second quarter, the company opened two healthcare distribution facilities in Kentucky and Hangzhou, China. A greater proportion of the more premium services could help push up the company’s yield in the international deliveries.

Following the earnings, we have revised our price estimate for UPS to $89, which is roughly in line with the current market price.

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