UPS Results Reveal Negative Global Trends


UPS announced second-quarter earnings on July 12, so the stock is not expected to move much based on today’s earnings report and call. However, results confirm negative trends common to UPS, FedEx, and freight forwarders in recent quarters, as shippers continue to trade down from premium to more economical shipping services. Also, forwarders face a glut of airfreight capacity due to available passenger aircraft belly space, and this crimps airfreight forwarding yields. Still, UPS guides to 4%-13% EPS growth in the second half of the year.

UPS grew second-quarter total revenue by a modest 1.2% and net income declined 4.0% as margins weakened in all three reporting segments. International package was the strongest volume driver, with average daily volume up 5%, but average revenue per piece declined 3.4% on service downshifts and lower fuel surcharges. U.S. domestic package volume increased 1.9% due to 2.3% expansion in ground, but here too yields disappointed with a meager 0.3% increase.

Supply chain and freight grew trucking revenue 11% and distribution revenue grew at a mid-single-digit rate, but the double-digit decline in freight forwarding revenue dominated these gains. Within forwarding, UPS indicated trans-Pacific demand was weak, particularly in tech. Supply chain and freight operating margin declined from 8.9% to 7.2%, pushing segment EBIT down 21% from the prior-year period. In our opinion, this does not warrant undue concern for the stock as this reporting segment comprises only 16% of sales and 9% of EBIT. Moreover, analysts think forwarding and distribution are high ROIC models that will help UPS expand in the long run, even if a soft global economy and modal shifts temporarily weaken margins.

Management indicated some U.S. shippers diverted parcel volume due to concerns about service interruption from labor strikes. On June 25, UPS announced that its Teamsters workers approved a five-year contract that covers about 235,000 employees, but contracts for less than truckload freight workers and 17 local supplemental contracts were yet unresolved. T he 1997 two-week strike cost UPS over $600 million, but i n our opinion, the risk of interrupted service seems low.


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