Earnings Preview: United Parcel (UPS)

United Parcel Services (UPS), the world’s largest package delivery company, is slated to release its second quarter 2010 results on July 22, 2010, before market opens. The current Zacks Consensus Estimate for the second quarter is 76 cents, representing a 55.30% annualized growth.

United Parcel had an average of 3.8% positive earnings surprise in 3 of the last 4 quarters. Hence, we will not be surprised if the carrier beats expectations in the second quarter owing to the growth in international package and supply chain businesses.

On its first quarter conference call, United Parcel stated that it expects earnings per share to increase 32% to 43% year over year in the range of $3.05–$3.30 for full-year 2010.

The year-over-year increase in earnings per share will likely remain fairly consistent across each quarter, with the fourth quarter showing a lower increase due to a more challenging year-over-year comparison.

Moreover, the company expects operating margins to improve going forward attributable to strong growth in the International Package as well as the Supply Chain and Freight segments.

First-Quarter Flashback

United Parcel reported first-quarter adjusted earnings per share of 71 cents surpassing the Zacks Consensus Estimate of 69 cents and the year-ago quarter’s earnings of 52 cents per share, driven by strong operating performance in each of the segments, yield improvement and operating leverage.

Total revenue increased 7.2% year over year driven by strong volume, which in turn, was led by robust earnings from International Package from improving global economic conditions. Adjusted operating income jumped 31.0% year over year.

In the U.S. Domestic Package, operating profit improvement is attributable to higher yields, stabilizing volume and network enhancement. The company experienced balanced growth across all regions and products due to a combination of higher volumes from existing customers and new customer wins, which led to an increase in International Package operating profit. The Logistics business in the Supply Chain and Freight segment was the primary driver for the hike in operating profit, which benefited from the strength in healthcare and high-tech areas.

Agreement of Analysts

Estimates for the second quarter are trending upward since the first quarter results, showing a clear directional agreement. Out of a total of 21 analysts currently covering the stock, 2 raised their estimates over the last 30 days and 2 analysts made positive revisions over the last week. No downward revision has been made over the same time periods. Estimates for full year 2010 have also been positive, with 2 out of total 22 analysts increasing their forecasts in the last 7 days as well as in the last 30 days with no negative revision.

The positive revision can be, in part, attributable to strengthening freight fundamentals, stronger International Package export volumes and recent reductions in fuel prices. Significant portions of the world economy are experiencing resurgence. International trade, inventory rebuilding, and retail sales in these areas will fuel earnings growth. Additionally, the company is currently working on future cost saving programs that will benefit operating margins within both Domestic and International Package operations.

Magnitude — Consensus Estimate Trend

The magnitude of revisions for the second quarter and the full year 2010 has been static over the last 7 days as well as 30 days. The current Zacks Consensus Estimate for 2010 is $3.27, reflecting a whopping gain of 41.74% year over year.

Our Analysis

With signs of economic recovery, albeit at a slower pace, we believe the company will benefit on its broad product portfolio, reliable service, integrated network, economies of scale, limited expense growth, and significant investments made on the domestic as well as international front. However, large European exposure, slowdown in global trade and lower operating leverage could limit the upside for the stock.

As the company completes many of its large investment projects (e.g., Worldport expansion), we expect it to generate significant free cash flow over the next several years.

Based on improving tends and fundamentals, we are maintaining our Buy recommendation with Zacks #2 Rank for the short term (1-3 months). However, we are currently reiterating our long-term Neutral recommendation on United Parcel Services.

UTD PARCEL SRVC (UPS): Free Stock Analysis Report
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