United Parcel Service, Inc. (UPS) recently delivered its 7 consecutive positive earnings surprises on solid revenue growth and a relatively high degree of operating leverage.
Management raised its guidance for 2011 following strong Q1 results. This prompted analysts to raise their estimates, sending the stock to a Zacks #2 Rank (Buy).
Brown has also been steadily raising its dividend over the last decade thanks to strong free cash flow generation. It currently yields 3.0%.
First Quarter Results
UPS reported first quarter earnings per share of 88 cents, beating the Zacks Consensus Estimate of 85 cents. It was a 24% increase over the same quarter in 2010.
Revenue for the quarter was up 7% to $12.58 billion as the company delivered 957 million packages. International Package revenue rose 10% to $2.90 billion.
Meanwhile, adjusted operating profit jumped 21% year-over-year as the company leveraged its fixed expenses.
Outlook
Management raised its guidance for 2011 following strong Q1 results. The company expects to earn between $4.15 and $4.40 per share this year. The Zacks Consensus Estimate rose on this news and is currently $4.33 per share, well within guidance. This corresponds to 22% growth over 2010 EPS.
The 2012 consensus estimate also rose and now stands at $5.00, representing 15% growth over 2011 EPS. It is a Zacks #2 Rank (Buy) stock.
Dividend
UPS continues to generate strong cash flows and has been returning value to shareholders through dividend increases. The company earned $900 million in free cash flow during the first quarter. Since 2000, UPS has raised its dividend at a compound annual rate of 11%.
It currently yields a stellar 3.0%.
Shares of UPS have pulled back a bit over the last several days amid weak economic reports and subsequent market pullback.
Assuming that this is just a soft patch and the U.S. doesn’t enter another recession anytime soon, this dip could be a good buying opportunity. Shares trade at 15.1x 12-month forward earnings, a significant discount to its 10-year median of 19.9x.
It sports a reasonable PEG ratio of 1.4 based on an expected 5-year growth rate of 11.6%.
Conclusion
UPS is a strong brand-name company that should continue to benefit from an increase in global economic activity. With 7 consecutive positive earnings surprises and rising earnings estimates, the recent dip could turn out to be a wonderful buying opportunity.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
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