UPS Q2 2017 Earnings Preview: Robust Demand Conditions To Drive Earnings Growth

by Trefis Team
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UPS (NYSE:UPS) is expected to release its second quarter earnings and conduct a conference call with analysts on July 27. [1] We expect steady top line growth for the company to translate into earnings growth.

UPS is expected to witness steady revenue growth across all major segments in Q2, driven by improved demand and pricing conditions. With the U.S. experiencing steady economic and jobs growth, consumer confidence is at a fifteen year high. [2] Favorable demand conditions should translate into another quarter of robust growth in e-commerce shipments, particularly B2C sales. This should boost the top line of the U.S. Domestic Package segment, which reported a 2.6% year-over-year increase in average daily package volumes in Q1, driven by 7% growth in B2C e-commerce shipments. [3]

As far as the company’s International Package segment is concerned, favorable economic conditions bode well for the division’s prospects.  Global economic growth is expected to accelerate to 3.5% in 2017 as compared to 3.2% last year. [4] Higher economic growth is expected to drive growth in both cross-border and domestic shipments. The International Package segment reported 12% growth in average daily package volumes in Q1. [3]

Besides higher shipment volumes, UPS’ results will benefit from improved pricing conditions. In addition to core pricing gains, driven by general inflation, increase in operating costs and improved demand conditions, the company’s revenue per package will get an additional boost from higher fuel surcharge revenues. Crude oil prices have averaged considerably higher this year (with Brent Crude prices expected to average around 16% higher year-over-year in 2017), which has translated into higher fuel prices and hence higher fuel surcharge revenues. [5] Thus, a combination of stronger shipments and pricing is expected to drive growth in UPS’ top line in Q2. While revenue growth is expected to be robust, rising operating costs are expected to partially offset the impact of strong top line growth on earnings. Start-up expenses for a number of company initiatives and investments aimed at enhancing service levels are expected to push up costs in the near term, thereby limiting earnings growth. However, these initiatives will help drive productivity gains in the longer term, which should benefit the company in the years to come. We will continue to monitor the progress made by the company with respect to its productivity improvement initiatives.

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Notes:
  1. Investor Relations Section, UPS Website []
  2. UPS Earnings Call Transcript, Seeking Alpha []
  3. UPS Q1 2017 Earnings Release, SEC [] []
  4. World Economic Outlook, IMF []
  5. Short Term Energy Outlook, EIA []
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