UPS Earnings Hurt by Lower Profits - Analyst Blog

United Parcel Service, Inc. UPS reported first quarter 2014 adjusted earnings per share of 98 cents, missing the Zacks Consensus Estimate $1.09. The bottom line slipped 5.8% from $1.04 earned in the corresponding quarter last year.

The company registered a significant rise in its operating cost during the quarter owing to harsh winter weather. In addition, revenue growth slowed, affecting the bottom line.  

Total revenue for the quarter grew 2.6% year over year to $13,779 million but fell short of the Zacks Consensus Estimate of $13,891 million. Total adjusted operating profit declined 4.2% year over year to $1,513 million.

Revenue Segments

US Domestic Package revenues rose 2.6% year over year to $8,488 million in the reported quarter. Adjusted operating profit dropped 14.6% year over year to $927 million. Operating margin fell 220 basis points (bps) to 10.9%.

Average daily volume increased 4.2% on Deferred and Ground volume expansion. Revenue per piece dipped 1.5% year over year given lower fuel surcharges, unfavorable changes in product and customer mix and higher service refunds.

International Package revenues rose 5.0% year over year to $3,127 million given growth in the U.S. export products. Operating profit grew 12% year over year to $438 million. Operating margin expanded 90 bps year over year to 15.9%.

Average daily volume grew 7.9% year over year on strong international shipments in Europe and the Asia-to-Europe trade lane. Revenue per piece fell 2.1% year over year due to lower fuel surcharges and increased demand for non-premium products.

Supply Chain and Freight revenues were down 1.0% year over year at $2,164 million due to revenue decline in the Freight Forwarding business. Operating profit increased 3.5% year over year to $148 million given gains in the Forwarding and Distribution units.

Liquidity   

UPS generated free cash flow of $1.9 billion and spent $321 million in the first quarter. The company repurchased 6.8 million shares worth $660 million and paid dividends of $596 million in the reported quarter.

Guidance

The company maintains 2014 diluted earnings per share estimate in the range of $5.05 to 5.30, representing growth of 11% to 16% over 2013 adjusted earnings per share.

Our Analysis

We believe that the booming health care segment, shipment and yield growth as well as productivity improvements will help UPS to fuel profitability in the future. Moreover, the company's strategic investments, technology-backed operations and enhanced worldwide network will strengthen its market position and safeguard shareholder value despite unfavorable market dynamics.

However, factors like labor unionization, competitive threats from players like FedEx Corp. FDX and Radiant Logistics, Inc. RLGT as well as economic upheaval continue to pose significant threats to UPS growth.

Currently, UPS holds a Zacks Rank #4 (Sell).

Other Stocks

Better-ranked stocks in this sector include Avianca Holdings S.A. (AVH), which has a Zacks Rank #1 (Strong Buy).