United Parcel (UPS) Posts In-Line Q2 Earnings, Stock Down

United Parcel Service, Inc. (NYSE:UPS) reported second-quarter 2016 earnings of $1.43 per share, in line with the Zacks Consensus Estimate. Earnings were, however, up 6% on a year-over-year basis.

Quarterly revenues improved 3.8% over the year-ago quarter to $14.63 billion. Growth was witnessed across all the three divisions of the company. Revenues narrowly beat the Zacks Consensus Estimate of $14.61 billion. However, foreign currency movements and lower fuel surcharges impacted sales to a certain extent. Meanwhile, the results failed to find favor with investors, resulting in a drop in stock value during early trading.

Segmental Details

U.S. Domestic Package revenues inched up 2.4% year over year to $9 billion in the reported quarter. Segmental operating profits improved 2.7% to $1.2 billion. Operating margin came in at 13.7%, up 10 basis points. Results were boosted by a decline in cost per unit and productivity improvement.

Segmental average daily package volumes climbed 2.5% driven by a 2.4% rise in Ground products and 5.6% growth in Next Day Air services. Average revenue per piece was flat during the quarter owing to lower fuel surcharges. Changes in product and customer mix were offset by a rise in base rates.

International Package revenues improved 1.1% to $3.1 billion despite foreign currency movements hurting revenues to the tune of 40 bps. Segmental revenues were impacted by 170 bps due to decline in fuel surcharges. Export shipments improved 3.9% in the second quarter of 2016 on the back of growth in Europe and Asia.

Segmental operating profits grew in excess of 11% in the quarter to $613 million – record high for a second quarter. Disciplined pricing coupled with gains from network efficiency and volume expansion contributed to the improvement. Revenue per piece increased 1.4% (on a currency neutral basis) hurt by lower fuel surcharge rates. Changes in trade lane and customer mix nullified the upside in base rates.

Supply Chain and Freight revenues increased over 13% to $2.5 billion. Segmental results were aided by the acquisition of Coyote Logistics, which was completed in the third quarter of 2015. Operating profits in the segment declined 7.2% to $192 million in the quarter under review, hurt by weaknesses in the Air Freight Forwarding and less than truckload (LTL) markets.

Liquidity

United Parcel generated free cash flow of $3.7 billion and spent $1 billion as capital expenditure in the first six months of the year. Moreover, in the second quarter of 2016, United Parcel shelled out approximately $1.3 billion in dividend payments to shareholders, reflecting a 6.8% improvement over the year-ago payout. Moreover, it bought back 13.3 million shares for $1.3 billion. We are impressed with the company’s efforts to reward shareholders consistently through buybacks and dividend payouts.

Guidance

The package delivery company maintains its adjusted earnings per share projection for 2016 in the band of $5.70 to $5.90. The range reflects 5% to 9% growth over the comparable 2015 figure of $5.43. The Zacks Consensus Estimate for 2016 currently stands at $5.79, well within the company’s guided range.

Zacks Rank & Key Picks

Currently, United Parcel has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader transportation space include Danaos Corporation (NYSE:DAC) , Scorpio Bulkers (NYSE:SALT) and LATAM Airlines Group S.A. (NYSE:LFL) . While Danaos Corporation and Scorpio Bulkers sport a Zacks Rank #1 (Strong Buy), LATAM Airlines carries a Zacks Rank #2 (Buy).