UPS Delivers Record 2Q (FDX) (UPS)

Zacks

Before the opening bell, United Parcel Services (UPS), the world's largest package delivery company, reported second quarter adjusted earnings of $1.05 per share that outpaced the Zacks Consensus Estimate by a penny. Earnings per share showed substantial 25% growth from 84 cents in the year-ago quarter.

UPS generated record earnings per share in the second quarter. Healthy US Domestic Package revenue, strong export volumes in International Package as well as improved performance in its Supply Chain and Freight segment led to the quarter’s outperformance.

Total revenue grew 8.1% year over year to $13.2 billion and beat the Zacks Consensus Estimate of $13.1 billion. The year-over-year increase reflects consolidated volume growth of 1% and a 7.1% increase in total revenue per piece. Adjusted operating income climbed 18.8% year over year to $1.67 billion, reflecting an operating margin of 12.6%, which was up 110 basis points (bps).

Revenue Segments

US Domestic Package revenue rose 6.4% year over year to $7.7 billion in the reported quarter. Adjusted operating profit leaped 31.1% from the year-ago quarter to $981 million, resulting in a 240 bp expansion in operating margin to reach 12.7%.

The margin expansion was driven by higher yields and improved network efficiencies. Average daily volume slipped 0.2% year over year due to weak growth in Ground volumes. Revenue per piece improved 5.7% year over year.

International Package revenue increased 13.3% year over year to $3.1 billion. Adjusted operating profit fell 4.6% year over year to $497 million and operating margin contracted to 15.8% from 18.8% in the year-ago quarter.

Average daily volume expanded 6.2% year over year on strong 8.1% growth in export average daily volumes and a hefty 4.9% growth in domestic volumes. Revenue per piece increased 6.3% from the year-ago quarter.

Supply Chain and Freight segment revenue grew 7% to $2.3 billion and adjusted operating profit soared 40.6% to $187 million from the year-ago quarter. Operating margin expanded 200 bps year over year to 8.1%, primarily attributable to strong growth in the Forwarding business, which was led by revenue initiatives and encouraging shipping rates. Freight business also showed a substantial growth of 19% year over year.

Liquidity

UPS generated free cash flow of $2.3 billion and spent $951 million in the first half of the year. The company repurchased 14.4 million shares for approximately $1.1 billion in the same period.

Guidance

Based on solid performance in the second quarter, UPS reiterated its adjusted earnings guidance of $4.15 to $4.40 per share for fiscal 2011. The mid-point ($4.28) is well above the current Zacks Consensus Estimate of $4.34.

Our Analysis

Fiscal 2011 is expected to be a record year for UPS in terms of profits. We believe the company will deliver healthy revenue and margin expansion, driving earnings per share above previous peak levels. This can be achieved through operating leverage with improved pricing and volume.

However, we expect the company’s near-term results to be dampened by surging fuel prices, labor unionization, large European exposure, and intense competition particularly from FedEx Corporation (FDX).

We are currently maintaining our long-term Neutral recommendation on United Parcel. For the short term (1–3 months), the stock retains a Zacks #2 (Buy) Rank.

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