Earnings Scorecard: United Parcel

United Parcel Services (UPS), the world’s largest package delivery company, reported first quarter 2011 results on April 26. Adjusted earnings of 88 cents beat the Zacks Consensus Estimate by 3 cents and were 17 cents above the year-ago earnings.

First Quarter Review

Despite steeply rising fuel prices and challenging weather conditions, United Parcel posted encouraging first quarter results driven by strong revenues across all its segments.

Total revenue improved year over year on higher volume growth but was below the Zacks Consensus Estimate. Operating income showed a substantial increase backed by the Supply Chain and Freight segment, which experienced an upswing during the quarter.

US Domestic Package revenue and operating income increased on higher yields and improved efficiencies. Revenue and operating income at International package also remained healthy. Further, strong growth in UPS Freight as well as the Forwarding businesses led to improved Supply Chain and Freight revenues and operating income.

(Read our full coverage on this earnings report: UPS Tops, Ups Guidance)

Agreement of Analysts

Following the first quarter earnings, the analysts are skewed more toward the positive side in estimate revisions for the upcoming quarter and fiscal year. This trend was noticed over both the last 7 and 30 days.

For the upcoming quarter, out of 24 analysts, 10 revised their estimates upward over the last 30 days while 6 analysts made downward revisions. None of the analysts moved in neither direction over the last 7 days.

For fiscal 2011, 22 and 2 analysts out of 27 made upward revisions over the last 30 days and 7 days, respectively. Similarly, for 2012, out of 24 analysts, 14 and 1 raised their estimates over the last 30 days and 7 days, respectively. None of the analysts moved in the opposite direction for both the years.

The analysts believe investor sentiments are improving for United Parcel Services, which largely competes with FedEx Corporation (FDX). Fiscal 2011 is expected to be a strong year for United Parcel with record profits. The company is expected to deliver healthy revenue and margin expansion driving earnings per share above the previous peak levels. This can be achieved through operating leverage with improved pricing and volume.

In addition, United Parcel is undergoing a series of initiatives that is expected to improve the company’s earnings power over the next several years. Key among these is a renewed focus on yield improvement in U.S. Domestic Package division. Other drivers include increased export volumes, improved domestic pricing, operating leverage benefits on 35–40% capacity expansion at Worldport and the flexible Teamster contract.

Over the long term, United Parcel’s primary focus will remain on health care end markets, which could be a larger contributor to growth in the future. Further, the company remains committed to shareholders through dividend payments and share buybacks. In the beginning of the year, United Parcel increased its quarterly dividend by 11% to 52 cents per share from 47 cents. The company’s dividend has more than tripled since 2000, when it was 17 cents per share. Additionally, share repurchases are expected to increase substantially to approximately $2 billion in 2011.

Magnitude –– Consensus Estimate Trend

The Zacks Consensus Estimate for the second quarter remained static at $1.04 over the last 7 days but rose by a penny over the last 30 days. The estimate represents a substantial 23.56% increase year over year.

The Zacks Consensus Estimate for fiscal 2011 is $4.33. The estimate rose by a penny over the last 7 days and 8 cents over the last 30 days and represents an improvement of 20.10% annually.

For fiscal 2012, the Zacks Consensus Estimate is $4.98, flat over the last 7 days and up by 6 cents in the last 30 days.

Earning Surprises

With respect to earnings surprises, the company’s fairly good track record is expected to continue in the coming quarters. United Parcel produced a positive average earnings surprise of 5.60% over the last four quarters, which suggests that it outpaced the Zacks Consensus Estimate by that amount over the last year.

Neutral Recommendation

We are encouraged by management’s increased confidence to deliver solid earnings growth in 2011 on volume growth, modest pricing, domestic margin expansion, freight recovery and accelerated free cash flow. Outstanding performance in Supply Chain and Freight segment, strong operating leverage, expanded yield, cost-control measures, increased share buybacks and continuous dividend payments make the stock attractive for investment. Thus, for the short term (1–3 months), the stock retains a Buy rating with the Zacks # 2 (Buy) Rank.

However, rising fuel prices, competitive threats, labor unionization and large Europe exposure keep us cautious on the stock. Hence, we are maintaining our long-term Neutral recommendation on United Parcel.

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