UPS Q4 Earnings: Will E-commerce Growth Beat Headwinds?

United Parcel Service, Inc. (NYSE:UPS) is scheduled to report fourth-quarter 2018 results on Jan 31, before the market opens.

Last reported quarter, the company’s earnings were in line with the Zacks Consensus Estimate. However, the bottom line improved substantially on a year-over-year basis. Meanwhile, revenues outpaced the Zacks Consensus Estimate and also increased significantly year over year. Results were aided by strong e-commerce growth.

Let’s see how things shape up for this announcement.

Factors Likely at Play

Similar to the last few quarters, solid e-commerce growth is likely to aid results in the fourth quarter as well. The company’s impressive show during the recent holiday season can be evidenced by the year-over-year improvement in on-time performance with respect to shipments.

Expanded package volumes at the U.S. Domestic Package segment are anticipated to boost segmental results. Notably, the Zacks Consensus Estimate for fourth-quarter U.S. Domestic Package revenues stands at $12,495 million, higher than $11,835 million a year ago.

Additionally, robust growth in export volumes is expected to boost results in the International Package segment. The Zacks Consensus Estimate for fourth-quarter International Package revenues is pegged at $3,826 million, above the year-ago reported figure of $3,753 million.

However, on a cautionary note, the company has been making significant investments in facility upgrades to meet the surge in demand following rapid e-commerce growth. The high capital expenditures might affect bottom-line growth in the to-be-reported quarter. Additionally, escalated delivery costs might further hamper earnings.

Moreover, UPS’ freight division is likely to witness a sluggish performance in the fourth quarter as revenues in the Supply Chain and Freight segment have been partly affected in early November due to a labor deal spat with its freight workers. The Zacks Consensus Estimate for freight revenues at the Supply Chain and Freight segment stands at $823 million, lower than $867 million reported in the third quarter of 2018.

Earnings Whispers

Our proven model clearly indicates that a company needs to have the right combination of the following two key ingredients — a positive Earnings ESP and a favorable Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise. However, that is not the case here as highlighted below.

Earnings ESP: UPS has an Earnings ESP of 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at $1.91 per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: UPS carries a Zacks Rank of 3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

We caution against all Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Investors interested in the broader Transportation sector may consider Expeditors International of Washington, Inc. (NASDAQ:EXPD) , ArcBest Corporation (NASDAQ:ARCB) and Hawaiian Holdings, Inc. (NASDAQ:HA) ) as these possess the perfect mix of elements to beat on earnings this reporting cycle.

Expeditors has an Earnings ESP of +0.39% and a Zacks Rank #1 (Strong Buy). The company will release fourth-quarter 2018 results on Feb 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcBest has an Earnings ESP of +4.78% and a Zacks Rank #2 (Buy). The company will release fourth-quarter 2018 results on Jan 30.

Hawaiian Holdings has an Earnings ESP of +1.63% and a Zacks Rank of 3. The company will release fourth-quarter 2018 results on Jan 29.

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