UPS Delivers More than Ever

On Tuesday, UPS UPS announced earnings per share of $1.28 excluding one-offs, an increase of 21% over the previous year on revenues of $14.2 billion, which were up 6%. Despite these figures being a new record for the company, they fall short of analyst expectations of $1.27 per share on sales of $14.5 billion. The company's jump in adjusted profits were thanks to a change in accounting. The company has moved to a mark-to-market method of calculating their pension liabilities, which caused the liability to jump by $527 million for 2011 and $75 million for 2010. This caused operating profit to fall by $840 million and the operating margin to decrease by 9.7%. Taking into account these losses, the company's EPS were 74 cents for Q4 2011, down 28% from Q4 2010. More importantly for the company is its increase in revenue and volumes, which demonstrates the company's continued growth despite competition from FedEx FDX, which has seen a slight rise in operating margins in 2011 and strong EPS of $1.57 in Q2 2011--much higher than earnings at UPS, which were just $1.05 per share for the same period. With many analysts maintaining a buy rating on FedEx, whose P/E ratio is lower than UPS, the competition may look like a better buy for investors on today's results. On the other hand, UPS is a dividend achiever with a dividend yield of nearly 3% and a dividend that has steadily risen for over a decade. Plus, the hit from the mark-to-market accounting change will begin to benefit the company, as it will limit swings in pension expense to the fourth quarter, which in theory will limit volatility for the company during the rest of the year. Other companies have recently moved to a mark-to-market accounting method for pensions. Honeywell HON, Verizon VZ, and AT&T T moved to the new accounting method recently, which were met by mixed market reactions. Honeywell jumped on the move, but Verizon and AT&T had a more muted response. This may be more because of investor concerns that lower margins at both companies--which were hit by higher costs due to iPhone subsidies--than because of pension worries. Therefore, we should focus more on Honeywell, which had little surprising news besides the pension changes. Although that company's stock suffered a sharp drop in early morning trading on Friday after reporting the results of the accounting change, it quickly recovered and ended the day slightly higher. We may see a similar story for UPS today, as the stock is up slightly in pre-market trading at $76.31, and investor worries about the pension costs might hit the stock price during intraday trading. However, investors will also need to keep in mind the company's strong performance and record revenues, which helped UPS deliver strong adjusted earnings. A steady rise in adjusted EPS over 2011, clocking in at $4.26 for the year, just surpassed Bloomberg analyst estimates of $4.24 per share.