UPS Q3 To Beat Expectations On The Back Of Higher Margins

by Trefis Team
+25.54%
Upside
99.58
Market
125
Trefis
UPS
UPS
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United Parcel Service (NYSE:UPS) reports its third quarter earnings on the 24th of October. The company has been focusing on servicing e-commerce in the quarter, and is expected to deliver a solid year-on-year increase in earnings, while revenue is expected to come in 8% higher at $17.2 billion.

UPS’s focus on e-commerce, especially among domestic routes, is expected to elevate its results for the quarter. Third quarter international package revenue is expected to come in at $3.6 billion, which is an increase of 9% year on year. While the supply chain and freight segment is expected to come in 13% higher.

 

We currently have a price estimate of $125 per share, which is 13% higher than the market price. You can use our interactive dashboard Q3 Outlook For UPS to modify key drivers and visualize the impact on UPS’s price estimate.

UPS has been facing increased capital expenditure costs, as it looks to improve its delivery and supply chain. In addition, higher delivery costs are likely to further weigh down its 3Q earnings. With rising delivery costs, UPS has been working on improving the cost efficiency for its delivery services. Accordingly, it plans to spend $1.3 billion by 2020 to turn around its cost structure and therefore bring margins back in line with the historical trends. It plans to open a number of super hubs, which will be automated. UPS expects that these hubs will be 30-35% more cost efficient compared to the current package sorting facilities.

UPS will continue to focus on two key areas: E-commerce and high growth international markets. Recently, the US pulled out of the Universal Postal Union (UPU) treaty which set prices for international packages. With close to 60% of the packages coming from Chinese customers shipping to the US, pulling out of the treaty allows UPS to become increasingly competitive in the small-medium package segment. These segments are crucial for the e-commerce side of UPS’s strategy and are likely to drive its value in the coming quarters.

Overall, the company continues to work towards becoming more efficient, as revenue growth remains moderate. It aims to achieve this by increasing automation, reducing costs, and streamlining its operations.

 

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