Why UPS’ Stock Increased 12% In The Last Year

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UPS: United Parcel Service logo
UPS
United Parcel Service

UPS‘s (NYSE:UPS) stock gained 12% in the last year following strong results in the first three quarters of 2016, partially offset by its performance in the last quarter. In full year 2016, the company’s top line grew 4% year-over-year (y-o-y) to $60 billion, driven by strong performance of the U.S. Domestic and Supply Chain and Freight divisions. Higher compensation benefits, which the company had predicted following its first quarter earnings, negatively impacted operating margins, but excluding market-to-market pension adjustments, the company’s adjusted net income was reported at $5.78 a share, 6% higher than last year.

On the back of a successful year, the company issued  full year 2017 EPS guidance in the range of $5.80 to $6.10, which was lower than market expectations of $6.17 per share.

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E-Commerce Drives Growth

Online purchases drove the demand for UPS’s services, with both U.S. Domestic Package and International Packages performing well last year. U.S. Domestic Package revenues witnessed growth of 4.2% on a y-o-y basis to $38.3 billion, primarily driven by a 4.1% rise in average daily volumes. However, the increased shipments did not lead to a rise in average revenue per piece, implying that the e-commerce growth may have led to more shipping of low revenue shipments. Within the segment, all three divisions – Next Day, Ground and Deferred – witnessed an increase in average daily shipments.

Last year, the company announced the increase in shipping rates for all its offerings. The average increase of 4.9% should boost revenue per piece. We expect the company’s revenue per shipment, which is a key driver of its valuation, will increase steadily from $7.97 in 2016 to around $9.35 billion by the end of our forecast period.

There could be a 6% upside to our price estimate if this number increases at a faster pace and reaches around $10.50 by the end of our forecast period.

Despite uncertainty in the global economy, UPS’s International Package segment witnessed a marginal uptick in its revenues. In 2016, the division’s revenues of $12.3 billion were almost 2% higher than the prior year period. This was primarily due to a 4.4% surge in daily package volume, partially offset by a 2% decrease in average revenue per piece. However, UPS’s efforts to streamline its international operations started to pay dividends, with the division’s adjusted operating income reported at $2.5 billion, a significant growth of 13%. Moreover, the division’s operating margins rose more than 200 basis points y-o-y to almost 20%. This was primarily due to lower fuel prices, better sorting facilities and favorable currency exchange rates.

During the year, UPS made a number of investments in order to cater to the increasing e-commerce demand. This included organic expansion of existing facilities in the U.S. and Europe and inorganic expansion through the acquisition of Marken. Higher capital spending, along with lower net cash from operations, resulted in a 30% decline in the company’s free cash flow, which was reported at $3.5 billion for the last calendar year.

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