J.P Morgan Comments On UPS's Strong Earnings

UPS UPS delivered strong cost side and Domestic Package margin performance in 4Q10 and the results point to a continuing path of strong EPS growth in 2011. Rising pension expense and a currency translation headwind within their international business are sources of modest cost inflation but JPM believes that UPS's cost side story overall is likely to be very favorable compared to a number of other large transports that are facing significant cost pressures. Relative to most of the large railroads and a number of other transports that face a step up in cost inflation in 2011, UPS's cost side outlook continues to be favorable. Labor mix should facilitate cost control in 2011 and incentive compensation is likely to move up only gradually as most of the rise in incentive comp was absorbed in 2010. J.P Morgan is raising its 2011 EPS estimate from $4.20/share to $4.25 and the 2012 EPS rises from $4.75 to $4.90/share. JPM believes it is notable that even in its revised forecasts, there is ample room for further improvement in domestic package margin. JPM's 2012 forecast assumes an OR of 86.7% which is still 340 bp below UPS's prior peak margin. JPM has an $86 PT and Overweight rating on UPS UPS closed Tuesday at $74.59