UPS Beats, Sees Record 2011 - Analyst Blog

Before the opening bell, United Parcel Services (UPS), the world's largest package delivery company, reported its fourth quarter 2010 adjusted earnings of $1.08 per share surpassing the Zacks Consensus Estimate of $1.05. Earnings per share showed a substantial 44% growth from 75 cents in the year-ago quarter.

Adjusted earnings exclude a net after-tax gain of $32 million related to the sale of certain non-core business units.

Adjusted earnings per share climbed 54% year over year to $3.56 in fiscal 2010.

Total revenue grew 8.4% year over year to $13.42 billion in the fourth quarter and was ahead of the Zacks Consensus Estimate of $13.41 billion. The year-over-year increase reflects consolidated volume growth of 3.9% and a 3.3% increase in total revenue per piece. Adjusted operating income leaped 39.7% year over year to $1.76 billion, reflecting an operating margin of 13.1%, up 290 basis points (bps). Supply Chain and Freight segment showed an impressive growth during the quarter.

In fiscal 2010, total revenue increased 9.4% year over year to $49.5 billion and adjusted operating profit soared 47% to $5.8 billion from the prior year. International Package as well as Supply Chain and Freight segments generated a record breaking operating income during the year.

Revenue Segments

US Domestic Package revenue rose 7% year over year to $8.1 billion in the reported quarter. Operating profit leaped 36.5% from the year-ago quarter to $1.04 billion, resulting in an operating margin of 12.9%, up 280 bps. The margin expansion was driven by strong growth in volume, higher yields and improved efficiencies. Average daily volume inched up 1.7% year over year on strong growth in Ground and Next Day Air. Revenue per piece improved 3.5% on increases in base pricing and higher fuel surcharges.

International Package revenue and operating profit increased 9.2% and 15% year over year to $3.1 billion and $537 million, respectively. Operating margin expanded 17.6% from 16.7% from the year-ago quarter. Export average daily volume rose 8.7% year over mainly from more than 30% export growth in China. Exports from Europe showed solid performance with double-digit growth in Germany.

Supply Chain and Freight segment revenue climbed 12.8% year over year to $2.3 billion. Operating profit jumped more than six times to $176 million on year-over-year basis, resulting in an operating margin of 7.7%, up 630 bps from the year-ago quarter. Profits increased on stronger revenue in UPS Freight as well as the Forwarding and Logistics business.

Liquidity

United Parcel generated free cash flow of $3.1 billion and spent $1.4 billion in fiscal 2010. The company repurchased a total of 12.4 million shares at a cost of approximately $800 million in 2010.

Outlook

For fiscal 2011, United Parcel projects adjusted earnings per share in the range of $4.12 to $4.35, representing an increase of 16% to 22% from the 2010 level. This guidance is expected to be higher than the peak earnings recorded by the company in 2007. The mid-point of $4.24 cents is well above the current Zacks Consensus Estimate of 4.17 per share.

The company expects to significantly ramp share repurchases to approximately $2 billion in FY11.

Our Analysis

We believe investor sentiment continues to improve for United Parcel Services, which largely competes with FedEx Corporation (FDX). Outstanding performance in Supply Chain and Freight segment, strong operating leverage, expanded yield, improved margins in domestic as well as international package, cost-control measures, the expected ramp up of share buybacks and continuous dividend payment make the stock attractive for investment. Based on these strong fundamentals, we are reiterating our Buy recommendation with a Zacks #2 Rank for the short term (1–3 months).

However, competitive threats, large European exposure and labor unionization keep us cautious on the stock. Thus, we are currently maintaining our long-term Neutral recommendation on United Parcel Services.

 
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