United Parcel Service (UPS) reported blowout earnings for the first quarter almost two weeks ahead of schedule on Wednesday evening.  In the Pre-Announcement press release, the company said they had expected this quarter to be challenging as the economic recovery gains steam.  Instead, profits hurdled 37% higher thanks to better international volume and operational efficiencies.  Earnings per share came in at $.71 per share; 19 cents better than last year and 13 cents higher than Wall Street expected.  The world’s largest package delivery company is generally regarded as an economic bellwether, as its service touches so many different sectors of the economy.  If this report is any indication, the first quarter may be even stronger than expected.

Revenue growth came in around 7% in the quarter which again topped estimates.  International package sales grew by 18% and revenue from the Supply Chain and Freight wasimage nearly as strong growing 14%.  Although domestic shipping volume only grew by 1%, it reversed two years of falling volume.  Clearly, it was improved margins allowed a 7% sales growth rate to stretch into a huge 37% earnings hike, although specific gross margin results were not released at this time.

The stronger than expected quarter and operating performance prompted UPS to lift its full year earnings guidance to $3.05 to $3.30 per share from the previous range of $2.70 to $3.05.  The stock has surged about 4% in the post market, but based on our methodology the stock is not expensive according to the current fundamentals.  UPS has improved margins and it’s a much leaner machine than in recent years, so it is generating cash at a rapid rate.  Yet the current valuation leaves plenty of room for appreciation.  For example, the current price-to-cash earnings multiple of 14x is not excessive compared to UPS’s historically normal range over the last ten years of 17.3x to 23.1x.  Similarly, price-to-sales per share stands at 1.45x which is well below the historically normal range of 1.57x to 2.14x.  Based on these historically normal market valuations and the current fundamentals, we think the stock could trade between $70 and $81 per share relatively soon.

For the most part, transportation stocks like UPS have outperformed even the most bullish expectations early in this earnings season, which is a great indicator for economic activity.  The full earnings release and conference call will provide further details on April 27th, but there is nothing wrong with what they released today.  We continue to believe the UPS is Undervalued at the current price level and this pre-announcement only serves to support our stance.  Volume is rising and margins are improving thanks to the leaner cost structure and we see further room for this stock to run higher.

UPS Delivers 1Q Results Earlier and Stronger than Expected