Services

Why UPS Soared Past Estimates

United Parcel Service Inc. (NYSE: UPS) posted second-quarter 2020 results before markets opened Thursday. The package delivery service reported adjusted diluted earnings per share (EPS) of $2.13 on revenues of $20.5 billion. In the same period a year ago, UPS reported EPS of $3.28 on revenue of $18.0 billion. Second-quarter results also compare to consensus estimates for EPS of $1.07 and $17.5 billion in revenue.

Carol Tomé, UPS chief executive officer, attributed the blockbuster results to a surge in demand for residential service, health care shipments related to the COVID-19 pandemic and stronger demand for shipments from Asia.

UPS withdrew fiscal year earnings and revenue guidance earlier this year due to “uncertainty around the timing and pace of economic recovery.” CFO Brian Newman commented that the firm’s liquidity and cash position “remain strong” and that the company has the ability to “invest in enabling capabilities through this time of unprecedented business disruption.”

In its first-quarter earnings report, UPS said it expected to cut capital spending by $1 billion this year. The company also suspended further share buybacks, a move it expects to reduce cash burn by $783 million.

Free cash flow for the first six months of 2020 totaled $3.9 billion, up sharply from $2.2 billion for the same period a year ago. Last year, UPS made a discretionary contribution of $1.0 billion to its pension fund, reducing its free cash flow by that amount. No such contribution has occurred so far this year.

On a consolidated basis, average revenue per-package was down 1.8% year over year. In the international segment, average daily volume dipped by 1.8%, which the company attributed to declines in commercial deliveries. Revenue in the U.S. domestic segment rose by 9.3%, and average daily package volume was up 8.5%. UPS acknowledged that its transformational investments “generated efficiency gains” but those benefits “did not offset the significant headwinds” caused by the COVID-19 pandemic.

Adjusted operating profit in the U.S. domestic segment dipped slightly from $1.23 billion in the second quarter of last year to $1.22 billion. Profit in the international segment rose by 26.6% to $842 million. Total operating profit, including supply chain and freight, improved by 7.4% year over year to $2.32 billion.

The consensus estimates for third-quarter EPS and revenues are $1.41 and $18.21 billion, respectively. For the full year, analysts are looking for EPS of $5.39 and revenues of $74.14 billion.

Premarket trading in UPS had the stock up by about 11.5% at $138.00, well above the 52-week range of $82.00 to $125.31. The 12-month consensus price target is $109.48, and the dividend yield at Wednesday’s closing price of $123.68 is 3.38%.