Can UPS deliver the numbers?

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UPS is about to announce its results for the second quarter of this financial year. The Street wants to know if it can deliver the goods. Bidness Etc unwraps the figures for a closer look.

United Parcel Service, Inc. (UPS) will be reporting its second quarter of fiscal year 2015 (2QFY15) earnings before Tuesday’s markets open. The Street has its fingers crossed for bottom and top line quarterly growth.

Through 2014, company stock has gained 6.16%, in that time the S&P500 Index picked up 11.81%. As seen in the chart below, the stock developed less investor interest than the S&P500, dropping 14.77% year-to-date (YTD) against the benchmark Index’s 1.02% rise.

What The Street Expects For UPS’ 2QFY15

Street calculations suggest the parcel company will report 1.60% year-over-year (YoY) revenue growth. Earnings per share (EPS) are expected to increase by 4.70% in the same period. Projections put 2QFY15 net

earnings 3.04% higher than the same point last year.

In the last month, 0.01% has been shaved off analysts’ predictions of $14.50 billion in quarterly company revenues. The quarter’s EPS is envisaged to amount to $1.26 – again revised down over the month, this time by one cent. The Street puts 2QFY15 predictions of net earnings at $1.15 billion representing an 8% margin, slightly up on last year’s 7.80% second quarter figure

YoY 2QFY15 cash flow generation is widely expected to advance to $1.38 billion, in contrast to 2QFY14’s negative $435 million. Quarterly free cash flow (FCF) of $1.05 billion is envisioned against a $926 million outflow during the same quarter last year

This quarter’s capital expenditure is estimated at $803 million, compared to $491 million spent at the same point last year. That $312 million leap stems from the entity’s recent round of network and service expansion announcements.

Higher cash flow generation, and an expanding bottom and top line point towards strong company growth. Chief Financial Officer, Kurt Kuehn wrote in the last quarterly earnings release, “We remain on plan to meet our guidance for full-year 2015 diluted earnings per share of $5.05 to $5.30, a 6%-to-12% increase over our 2014 adjusted results.”

Can UPS Deliver The Numbers?

Recent reports from both the company and publications, underline a vigorously expanding organizational network that is sucking in higher second quarter capital expenditure this year.

Bloomberg recently reported buyout talks between UPS and Chicago-based transport-management service, Coyote Logistics, worth $1.80 billion. This merger would strengthen UPS’ US network.

Another foray into buyout territory involves UPS Capital announcing the takeover of the G4S International Logistics (G4Si) subsidiary, Insured Parcel Services (IPS). UPS Capital President, Ronald Chang, said the acquisition would strengthen the company’s commitment to provide a high value parcel service.

Earlier, UPS bought up the high-value-parcel logistic service, Parcel Pro, which carries items such as jewelry, wrist-watches, and collectibles. The company plans to integrate the newly acquired IPS into Parcel Pro (PP) to improve PP’s services. Mr. Chang said IPS’ integration will would strengthen operations in regions such as the United Kingdom, Germany, Thailand, the United Arab Emirates, and Hong Kong.

Elsewhere, UPS’ Worldwide Express’ network will be expanded into five Latin American countries and three in Europe. UPS services will carry urgent, time-sensitive and high-value international heavyweight shipments touching 58 origin and 56 destination countries and regions.
Alongside the network expansions, the business has sealed a deal to transport goods from Staples, Inc.’s (SPLS) 1,300 US stores, at which, consumers could add shipment charges to their UPS account.

Past Quarterly Performance

As shown in the table to the left, UPS has exceeded earnings per share estimates (EPS) in three of the last eight quarters. Revenues have trailed what was predicted on five occasions. If the past is any indication of the future, there is a strong chance of UPS exceeding analysts’ estimates for 2QFY15 EPS, while missing those for revenues.

In this year’s first quarter, UPS’ EPS came in at $1.12 from revenues of $14.27 billion. The top line grew by 1.40% YoY. A 14.30% YoY advance in EPS was driven by a company share buyback scheme, which repurchased 6.70 million shares at a cost of $680 million.

In that first quarter, the company reported carrying 1.10 billion packages, a 2.80% expansion over the first quarter of last year. The multinational attributed the growth to 9.40% YoY improvement in European exports.
The stock traded up by 3.43%, following the publication of the quarterly report alongside the outlook provided.

Conclusion

The multinational is actively expanding its network and enhancing customer service. Both of these are expected to drive top line growth. International Air Transport Authority (IATA) data shows that second quarter international freight traffic displayed a YoY expansion of 3.10%, illustrating a high demand for courier services during that time.

At Bidness Etc, we believe the company’s financial results will top estimates when they are published tomorrow. In response, the stock will probably trade up.

Long-term, prospects for the stock also look promising. The recent weaknesses in the stock of rivals such as FedEx Corporation (FDX) – which lost 3.92% YTD – has led to UPS stock trading at a substantial discount to the industry average. It is currently trading at a 12-month blended forward price-to-earnings (P/E) multiple of 17.48 times, representing a 13.42% discount to the industry average P/E multiple of 20.19 times.