Yahoo Finance Could UPS’s Operating Margins Expand Going Forward?
United Parcel Service Beat 1Q16 Estimates: Why Is the Stock Flat?
UPS’s operating margins
In the last part, we looked at United Parcel Service’s (UPS) Supply Chain & Freight segment. In this part, we’ll look at the company’s operating margins. In 1Q16, UPS’s operating margins rose 9% to $1.8 billion compared to $1.6 billion in 1Q15. On a year-over-year basis, operating margins expanded to 12.6% from 11.9% in 1Q15.
Segmental operating profit
In the U.S. Domestic Package segment, operating margins expanded to 12.1%, and operating profits rose ~8%. The margin expansion was a result of the strong display of cost management, according to UPS. It was a result of synergies derived out of the company’s integrated network supported by technology.
The International Package segment’s operating profit increased 15%. This was a result of improved network management, incremental pricing, and in-country cost control exercise undertaken by UPS.
In the company’s Supply Chain & Freight segment, operating margins increased mainly due to better pricing backed by higher buy and sell rate spreads.
E-commerce customers drove both B2C (business-to-customer) and B2B (business-to-business) shipments higher. The company was able to achieve margin expansion in 1Q16 with growth of B2C and online purchases.
According to the company, it’s a leader in operating margin in its industry. As of April 30, 2016, UPS’s trailing 12-month operating margin stood at 14.6%. Operating margins for peers DHL, FedEx (FDX), and TNT Express NV (TNTE) were 10.7%, 10.4%, and 2.3%, respectively. UPS relies on its ability to combine an integrated network along with state-of-the-art operating technology to achieve industry-leading margins.
Declining fuel costs were the major contributor to this decline in operating expenses in 1Q16. Falling crude oil prices helped UPS lower its fuel costs from $644.0 million in 1Q15 to $434.0 million in 1Q16, a 33% decline.
Management outlook
In the U.S. Domestic Package segment, UPS is aiming at a 5%–9% operating profit supported by slight operating margin expansion in the current year. It foresees an 8%–12% operating profit in its International Package segment. The company aims to achieve a 3% margin expansion in this segment in the long run. In the Supply Chain & Freight segment, it’s targeting an operating profit of 6%–10% and a nearly 7% margin.
For 2016, UPS management expects another year of earnings growth. It expects to report 2016 EPS (earnings per share) of $5.70–$5.90, a 5%–9% increase over $5.43 in 2015. It reflects a slight margin expansion on a year-over-year basis.
Many analysts are anticipating crude oil to be back in action in the second half of 2016. If fuel prices rise, it will affect UPS’s earnings, even though the company operates a 6% fleet of alternative fuel. Any downward pressure on fuel prices will keep the company’s targets intact and may result in margin expansion.
UPS makes up 3.8% of the holdings of the Industrial Select Sector SPDR ETF (XLI). XLI also invests 2.4% in FedEx (FDX), UPS’s prime rival. Other major logistics companies included in XLI are CSX (CSX), Union Pacific (UNP), and C.H. Robinson Worldwide (CHRW).
Next, let’s see if we should expect higher dividends from UPS in 2016.
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