First Quarter Review
United Parcel Service (UPS), the world’s largest package delivery company, reported first quarter results on April 27, 2010. The company reported adjusted earnings of 71 cents per share, beating the Zacks Consensus Estimate of 69 cents per share and the prior-year quarter of 52 cents per share.
United Parcel Service began to benefit from improving economic conditions and from the cost-reduction initiatives of the previous year. Total revenues increased 7.2% to $11.7 billion from the prior-year levels. Adjusted operating income spurred 31.0% to $1.2 billion. All the business segments contributed to the margin expansion, given the growth in the international package and supply chain businesses, yield improvement and increased operating leverage.
As global economies are showing signs of recovery, the company is optimistic about the future prospects of the business going forward. The company expects first quarter trends to continue throughout 2010, producing strong revenue growth and additional operating leverage.
Agreement of Analysts
Following the first quarter results, the overall trend is inclined towards the positive side of estimate revisions for 2010 and 2011. Of the 21 analysts covering the stock, 5 raised their estimates for 2010, while 20 lifted 2011 earnings estimates. Further, 18 analysts increased their estimates for the second quarter and third quarter of 2010.
The strong positive revisions were fueled by operating leverage and improving economic conditions. Greater operating leverage can drive upside potential as additional volume and pricing generates greater top-line growth. The company is benefiting from the rebounding economy in both its domestic and international operations, as well as its ongoing focus on cost reduction.
None of the analysts made negative revisions for 2010 or 2011.
Currently, the Zacks Consensus EPS estimate for the second quarter 2010 is 75 cents. If materialize will result in a whopping growth of 53.9% year-over-year. Similarly, for full year 2011, the Zacks Consensus EPS estimate is $3.93, resulting in a substantial gain of 20.5% year-over-year.
Magnitude of Estimate Revisions
The first quarter beat was encouraging, and the Zacks Consensus Estimate has been raised 14 cents and 35 cents for 2010 and 2011, respectively, over the last 30 days. Also, the Zacks Consensus Estimate for the upcoming two quarters has been raised. The current Zacks Consensus Estimate is 75 cents, up from 68 cents over the last 30 days.
Earning Surprises
With respect to earnings surprises, the company’s fairly good track record is expected to persist in the coming quarters. United Parcel Service produced an impressive average earnings surprise of 3.8% over the last four quarters, which suggest that it beat Zacks Consensus Estimate by that amount over the last year. The company beat Zacks Consensus Estimate by 2.9% and 2.7% in the current quarter and the last quarter.
Our Analysis
Considering the upward estimate revision trends and upward magnitude of revisions, we find that there is no directional pressure on the shares. Thus, we are assigning an Outperform recommendation with the Zacks #2 Rank (Buy).
United Parcel Service will benefit from the improvement in the economy based on its broad product portfolio, reliable service, integrated network, economies of scale, limited expense growth and significant investments made on the domestic as well as international front. The company is profitable even during a recession and takes the market share from its competitors during growth periods.
The company is poised to take advantage of the recovery in international trade. Besides the growth in Domestic Package segment, the most potential upside lies within the Supply Chain and Freight segment.
Read the full analyst report on “UPS”
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