Earnings Scorecard: UPS

United Parcel Services (UPS), the world’s largest package delivery company, generated record second quarter 2011 earnings per share, announced on July 26, and expects fiscal 2011 to be a record year in terms of profits.

Second Quarter Review

Adjusted earnings of $1.05 beat the Zacks Consensus Estimate by a penny and were 21 cents above the year-ago earnings. Healthy U.S. Domestic Package revenue, strong export volumes in International Package as well as improved performance in Supply Chain and Freight segment led to the quarter’s outperformance.

Total revenue improved year over year and was ahead of the Zacks Consensus Estimate on higher volume growth. Operating income showed a substantial increase backed by whopping growth in the Supply Chain and Freight segment.

U.S. Domestic Package revenue and operating income increased on higher yields and improved efficiencies. Revenue was stronger for International package while operating income remained depressed. Further, strong growth in UPS Freight as well as Forwarding businesses led to improved Supply Chain and Freight revenues and operating income.

(Read our full coverage on this earnings report: UPS Delivers Record 2Q)

Agreement of Analysts

Following second quarter earnings, the analysts are skewed more toward the negative 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 23 analysts, 16 revised their estimates downward over the last 30 days while none made a positive revision. None of the analysts moved in either direction over the last 7 days.

For fiscal 2011, 18 analysts out of 24 made downward revisions over the last 30 days while one moved upward. Over the last 7 days, one analyst revised the estimate upward while none moved in the opposite direction.

Similarly, for 2012, out of 24 analysts, 9 and 1 reduced their estimates over the last 30 days and 7 days, respectively. 5 analysts made upward revisions over the last 30 days while none moved in the same direction in the last 7 days.

The analysts believe the company’s short-term results will be dampened by surging fuel prices, labor unionization and intense competition particularly from FedEx Corporation (FDX). In addition, UPS derives a significant portion of its revenue from international operations, including its business in the emerging markets.

Emerging markets are volatile and any significant downturn in these markets could reduce the company’s revenues. Further, half of the company’s international revenue comes from Europe, where sovereign debt concerns could weigh on the pace of recovery.

However, the analysts believe investor sentiments are improving for United Parcel, as the company is confident of delivering record earnings in 2011. The company expects 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.

Further, UPS focuses on health care markets, which could be a significant contributor to future growth. The company also inked a new deal with health care giant Merck & Co. Inc. (MRK) to expand its distribution and logistics services

In addition, the analysts believe improved performance in Supply Chain and Freight segment, strong export volumes in International Package, expanded yield, improved margins in Domestic Package, cost-control measures, increased share buybacks and continuous dividend payments would fuel earnings growth going forward.

Magnitude –– Consensus Estimate Trend

The Zacks Consensus Estimate for the third quarter remained static at $1.08 over the last 7 days but fell by 4 cents over the last 30 days. The estimate represents a substantial 16.27% increase year over year.

The Zacks Consensus Estimate for fiscal 2011 is $4.28, unchanged over the last 7 days but reduced from $4.34 over the last 30 days. The estimate represents an improvement of 19.65% annually.

For fiscal 2012, the Zacks Consensus Estimate is $4.98, flat over the last 7 days and down 2 cents over 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. UPS produced a positive average earnings surprise of 3.56% 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, improved pricing, domestic margin expansion, freight recovery and accelerated free cash flow. Although UPS is expected to generate record earnings per share in 2011, its results could be dampened by surging fuel prices, intense competition, renewed uncertainties in the U.S. economy and debt concerns in Europe.

Hence, we are maintaining our long-term Neutral recommendation on UP. The stock has a Zacks #3 (Hold) Rank for the short term.

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