Before the opening bell, United Parcel Services (UPS), the world’s largest package delivery company, reported first quarter 2011 adjusted earnings of 88 cents per share surpassing the Zacks Consensus Estimate of 85 cents. Earnings per share showed a substantial 24% growth from 71 cents in the year-ago quarter.
Despite steeply rising fuel prices and challenging weather conditions, United Parcel produced encouraging first quarter results driven by strong revenues across all segments. Total revenue grew 7.3% year over year to $12.58 billion, but fell shy of the Zacks Consensus Estimate of $12.72 billion. The year-over-year increase reflects consolidated volume growth of 1.8% and a 5.2% increase in total revenue per piece.
Adjusted operating income climbed 21.1% year over year to $1.43 billion, reflecting an operating margin of 11.3%, which was up 130 basis points (bps). The improvement was backed by the Supply Chain and Freight segment, which experienced an upswing during the quarter.
Revenue Segments
US Domestic Package revenue rose 6.2% year over year to $7.5 billion in the reported quarter. Adjusted operating profit leaped 28.6% from the year-ago quarter to $849 million, resulting in a 200 bps expansion in operating margin to 11.3%. The margin expansion was driven by higher yields and improved efficiencies.
Average daily volume slipped 0.5% year over year due to weak growth in Ground and Deferred, partially compensated by strong Next Day Air volumes. Revenue per piece improved 5% on increases in base rates and higher fuel surcharges.
International Package revenue and operating profit increased 9.9% and 4.4% year over year to $2.9 billion and $446 million, respectively. However, operating margin contracted to 15.4% from 16.2% in the year-ago quarter. Average daily volume expanded 4% year over year on strong 7.2% growth in export average daily volumes and a hefty 2.1% growth in domestic volumes.
Supply Chain and Freight segment revenue grew 7.6% to $2.1 billion and adjusted operating profit soared 44% to $131 million from the year-ago quarter. Operating margin expanded 150 bps year over year to 6.1%, primarily attributable to strong growth in UPS Freight as well as the Forwarding business.
Guidance
Based on solid performance in the first quarter, United Parcel raised its adjusted earnings guidance to $4.15 to $4.40 per share from $4.12 to $4.35. The new guidance represents an increase of 17% to 24% from the 2010 level. The mid-point of $4.28 is well above the current Zacks Consensus Estimate of 4.25.
Liquidity
United Parcel generated free cash flow of $900 million and spent $400 million in the first quarter. The company repurchased 6.8 million shares for approximately $500 million.
Our Analysis
We believe investor sentiment will continue to improve for United Parcel Services, which largely competes with FedEx Corporation (FDX). Fiscal 2011 is expected to be a strong year for United Parcel with healthy revenue, strong margin expansion and record profits. This can be achieved through operating leverage, improved pricing and volume. However, rising fuel prices, competitive threats, large European exposure and high unionization keep us cautious on the stock.
We are currently maintaining our long-term Neutral recommendation on United Parcel with the Zacks #3 (Hold) Rank.
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