United Parcel Service, Inc. (UPS) reported first quarter 2012 earnings per share of $1.00, just a penny below the Zacks Consensus Estimate. However, earnings per share grew 10% from the year-ago quarter earnings of 91 cents. The year-over-year growth was primarily based on higher freight rates and fuel surcharges.

Total revenue for the quarter grew 4.4% year over year to $13.1 billion, but fell shy of the Zacks Consensus Estimate of $13.3 billion. The year-over-year increase in revenue was a result of the company’s growing e-commerce business coupled with its improving shipping solutions. In the reported quarter, consolidated volume grew 4.3% year over year and revenue per piece inched up 0.9% year over year.

Adjusted operating profit increased 6.7% year over year to $1.6 billion, reflecting an operating margin of 11.9%, up 20 basis points (bps) from 11.7% in the year-ago quarter. The growth was primarily backed by higher profits from the U.S. Domestic, and Supply Chain and Freight segments.

Revenue Segments

US Domestic Package revenue rose 6.1% year over year to $8 billion in the reported quarter. Operating profit leaped 13.1% year over year to $995 million, and consequently operating margin expanded 70 bps to 12.4%.

Average daily volume increased 3.8% due to a growth in online shopping. Revenue per piece improved 4.5% year over year driven by higher rates and fuel surcharges that offset lower package weight and changes in customers and products mix.

International Package revenue climbed 2.4% year over year to $3 billion driven by higher trades in Europe, Mexico and intra-Asia routes. Operating profit fell 9.9% year over year to $408 million in the reported quarter and operating margin contracted to 13.8% from 15.6% in the year-ago quarter. Lackluster margin performance was due to higher fuel expenses as well as unfavorable product and trading trends.

Average daily volume enhanced 2.8% year over year on a 5.4% growth in export average daily volumes. Domestic average daily volumes inched up 1.1% year over year. Revenue per piece was down 0.1% from the year-ago quarter due to weaker Asian business.

Supply Chain and Freight revenue inched up 1.3% to $2.2 billion and operating profit climbed a substantial 19.4% to $166 million from the year-ago quarter. Operating margin expanded 120 bps year over year to 7.7%, primarily attributable to strong growth in the Freight business.

Liquidity

During the first quarter, UPS generated free cash flow of $1.8 billion and its capital expenditure was $417 million. The company repurchased 7.1 million shares for approximately $550 million in the first quarter.

Guidance

Based on strong performance in the first quarter, UPS reiterated its adjusted earnings guidance of $4.75 to $5.00 per share for fiscal 2012, reflecting a growth of 9-15% over fiscal 2011 adjusted earnings results.

Our Analysis

We believe that a healthy performance in the Supply Chain and Freight segment, strong export volumes in International Package as well as improved margins in Domestic Package will fuel continue to UPS’ future profitability.

Additionally, the proposed acquisition of TNT Express, a Dutch shipping company, is also expected to be accretive to the company growth. The deal, which represents the largest acquisition in the history of UPS, will likely boost annual revenues to more than EUR45 billion ($60 billion). However, labor unionization, large European exposure and competitive threats, particularly from FedEx Corporation (FDX) keep us cautious on the stock.

We, currently, have a long-term Neutral rating on UPS. For the short term (1-3 months), the stock retains a Zacks #3 Rank (Hold).

To read this article on Zacks.com click here.

Zacks Investment Research