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We take a look at the first quarter of the 2019 fiscal year results of one of the world's largest parcel shipping and logistics firms, United Parcel Service, or more commonly known as UPS. Has the strong economic growth in the USA and strong consumer spending benefited the group?
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About United Parcel Service (UPS)
United Parcel Service is an American multinational package delivery and supply chain management company. United Parcel Service, Inc. (“UPS”) was founded in 1907 as a private messenger and delivery service in Seattle, Washington. Today, UPS is the world’s largest package delivery company, a leader in the U.S. less-than-truckload industry and the premier provider of global supply chain management solutions. We deliver packages each business day for 1.5 million shipping customers to 7.9 million receivers ("consignees") in over 220 countries and territories. In 2013, we delivered an average of 16.9 million pieces per day worldwide, or a total of 4.3 billion packages. We are a global leader in logistics, and we create value for our customers through solutions that lower costs, improve service and provide highly customizable supply chain control and visibility. Customers are attracted to our broad set of services that are delivered as promised through our integrated ground, air and ocean global network.
U.S. Domestic Package Reporting Segment. Offers a full spectrum of U.S. domestic guaranteed ground and air package transportation services.
International Package Reporting Segment. Includes the small package operations in Europe, Asia, Canada and Latin America, the Indian sub-continent, Middle East and Africa. UPS offers a wide selection of guaranteed day and time-definite international shipping services.
Supply Chain & Freight Reporting Segment. Supply chain complexity creates demand for a global service offering that incorporates transportation, distribution and international trade and brokerage services, with financial and information services.
Freight Forwarding. UPS is one of the largest U.S. domestic air freight carriers and among the top international air freight forwarders globally. As one of the world’s leading non-vessel operating common carriers, UPS also provides ocean freight full-container load and less-than container load shipments between most major ports around the world.
Customs Brokerage. UPS is among the world’s largest customs brokers by both the number of shipments processed annually and by the number of dedicated brokerage employees worldwide. We provide our customers with customs clearance, trade management and international trade consulting services.
Distribution Services: UPS’s comprehensive distribution services are provided through a global network of distribution centers that manage the flow of goods from receiving to storage and order processing to shipment. UPS also provides many specialized services to streamline supply chains in the health care, high tech, retail and aerospace industries. Together, these services allow companies to save time and money by minimizing their capital investment and positioning products closer to their customers.
Post Sales: Post Sales services support goods after they have been delivered or installed in the field. We leverage our global distribution network of field stocking locations to ensure that the right type and quantity of our customers’ stock is in the right locations to meet the needs of their end-customers. This service allows our customers to maximize service while reducing costs.
UPS Mail Innovations: Offers an efficient, cost-effective method for sending lightweight parcels and flat mail to global addresses from the U.S. We pick up customers’ domestic and international mail, and then sort, post, manifest and expedite the secured mail containers to the destination postal service for last-mile delivery.
UPS Freight. Offers regional, inter-regional and long-haul less-than-truckload (“LTL”) services, as well as full truckload services, in all 50 states, Canada, Puerto Rico, Guam, the U.S. Virgin Islands and Mexico.
UPS Capital. Offers a range of services, including export and import financing to help improve cash flow, risk mitigation offerings to protect goods, as well as payment solutions that help speed the conversion cycle of payments.
U.S. Domestic Package Reporting Segment. Offers a full spectrum of U.S. domestic guaranteed ground and air package transportation services.
International Package Reporting Segment. Includes the small package operations in Europe, Asia, Canada and Latin America, the Indian sub-continent, Middle East and Africa. UPS offers a wide selection of guaranteed day and time-definite international shipping services.
Supply Chain & Freight Reporting Segment. Supply chain complexity creates demand for a global service offering that incorporates transportation, distribution and international trade and brokerage services, with financial and information services.
Freight Forwarding. UPS is one of the largest U.S. domestic air freight carriers and among the top international air freight forwarders globally. As one of the world’s leading non-vessel operating common carriers, UPS also provides ocean freight full-container load and less-than container load shipments between most major ports around the world.
Customs Brokerage. UPS is among the world’s largest customs brokers by both the number of shipments processed annually and by the number of dedicated brokerage employees worldwide. We provide our customers with customs clearance, trade management and international trade consulting services.
Distribution Services: UPS’s comprehensive distribution services are provided through a global network of distribution centers that manage the flow of goods from receiving to storage and order processing to shipment. UPS also provides many specialized services to streamline supply chains in the health care, high tech, retail and aerospace industries. Together, these services allow companies to save time and money by minimizing their capital investment and positioning products closer to their customers.
Post Sales: Post Sales services support goods after they have been delivered or installed in the field. We leverage our global distribution network of field stocking locations to ensure that the right type and quantity of our customers’ stock is in the right locations to meet the needs of their end-customers. This service allows our customers to maximize service while reducing costs.
UPS Mail Innovations: Offers an efficient, cost-effective method for sending lightweight parcels and flat mail to global addresses from the U.S. We pick up customers’ domestic and international mail, and then sort, post, manifest and expedite the secured mail containers to the destination postal service for last-mile delivery.
UPS Freight. Offers regional, inter-regional and long-haul less-than-truckload (“LTL”) services, as well as full truckload services, in all 50 states, Canada, Puerto Rico, Guam, the U.S. Virgin Islands and Mexico.
UPS Capital. Offers a range of services, including export and import financing to help improve cash flow, risk mitigation offerings to protect goods, as well as payment solutions that help speed the conversion cycle of payments.
So to the numbers we go
The following financial results were reported by UPS in their 1st quarter 2019 earnings report.
- Revenue $17.160 billion (up 0.3% from $17113 billion in the prior year). Basically revenue came in flat compared to the previous period
- Operating income: $1.394 billion (down -8.3% from $1.520 billion in the prior year). One would have expected strong economic growth and consumer spending would have benefited the group greatly but it has not been the case. They actually recorded a pretty strong decline in their net income and earnings per share.
- Net income: $1.111 billion (up -17.4% from $1.345 billion in the prior year)
- Diluted earnings per share: $1.28 (down -17.4% from $1.55 in the prior year)
- PE ratio: 7.64
- Cash generated from operations (Net earnings from operating activities): $2.277 billion (or $2.61share)
- Dividend: $0.96
- Dividend yield: 3.95%
- Tobins's Q: 1.32 (thus the market capital of the group is 1.32 times the value of their total assets). A Tobin's Q usually indicates that a stock might be overvalued. But it is only a guide.
- Average revenue per piece shipped: $11.08 up 1% from $10.97 in the previous period.
- Their net asset value is very low though with their shareholders equity amounting to just $4 a share. ($3.485 billion divided by 869 million shares). But not uncommon for operating entities to trade far above their stated net asset value or shareholder equity.
- UPS does have significant amounts of long term debt that it needs to pay off though ($20.33 billion of long term debt up from $19.31 billion a year ago)
So any comments or guidance from management on the results?
The group had the following to say regarding their first quarter 2019 earnings in their press release of their financial results.
“The first quarter marked a good start to the year, as we executed against our strategy and generated solid performance across our business,” said David Abney, UPS chairman and CEO. “Our Transformation initiatives are enhancing revenue quality and creating network efficiencies that will increase our long-term earnings power. We are on a path to take advantage of growth opportunities and enhance our future performance.”
- 1Q19 EPS of $1.28; 1Q19 Adjusted^ EPS of $1.39
- Weather Lowered U.S. Profit by about $80M or $0.07 EPS
- U.S. Daily Air Volume Rose Nearly 8%; Growth Across All Products
- U.S. Revenue Yields Up, Led by Ground Products
- Supply Chain and Freight Operating Profit Up Nearly 18%; Adjusted Operating Profit Increased More Than 24%
- International Operating Margin of 15.3%; Adjusted Operating Margin of 17.7%
- Cash from Operations of $2.3B; Free Cash Flow about $760M
- UPS reaffirms adjusted diluted EPS in the range of $7.45 to $7.75
“The first quarter marked a good start to the year, as we executed against our strategy and generated solid performance across our business,” said David Abney, UPS chairman and CEO. “Our Transformation initiatives are enhancing revenue quality and creating network efficiencies that will increase our long-term earnings power. We are on a path to take advantage of growth opportunities and enhance our future performance.”
Management outlook for the company
The company provides guidance on an adjusted (non-GAAP) basis because it is not possible to predict or provide a reconciliation reflecting the impact of future pension mark-to-market adjustments or other unanticipated events, which would be included in reported (GAAP) results and could be material.
“Transformation is creating a firm foundation for performance well into the future,” said Richard Peretz, UPS’s chief financial officer. “Our strategies and initiatives are driving additional network efficiency and flexibility, and we remain confident in achieving our targets for the year.”
“Transformation is creating a firm foundation for performance well into the future,” said Richard Peretz, UPS’s chief financial officer. “Our strategies and initiatives are driving additional network efficiency and flexibility, and we remain confident in achieving our targets for the year.”
- The company reaffirms adjusted diluted EPS will be in the range of $7.45 to $7.75.
- Adjusted free cash flow for the year is projected to be between $3.5 and $4 billion with potential additional upside from the working capital initiatives.
- The effective tax rate for 2019 is estimated to be between 23% and 24%.
- In the second quarter, we will open about 30% of our planned 2019 capacity; no facilities were opened during the same period last year. Thus onboarding costs will weigh on the second-quarter results.
- Overall operating profit in the second quarter is expected to grow. Adjusted EPS is anticipated to be relatively flat to last year driven by planned pension financing costs.
- Third-quarter adjusted EPS is expected to benefit from numerous items including one additional operating day and year-over-year International benefits from 2018 commodities headwinds that should not repeat.
- Transformation-related charges and pension MTM are not included in the adjusted guidance.
So what about UPS share price performance in recent years? To be honest it seems to be going nowhere slowly with the returns offered over the last 5 years basically being flat with loads of ups and downs in its share price over the last 5 years.
UPS (NYSE: UPS) share price history
UPS share price from 2014. And as mentioned above the share price has been pretty volatile over the last couple of years, unlike a company such as Netflix that we looked at earlier today that showed significant share price growth over the last couple of years.
UPS share price history
So should you buy UPS shares?
Well when potential investors take a look at its share price performance and compare it to say Netflix or Starbucks or Home Depot they will say no I shouldn't invest in UPS shares as the opportunity cost of investing in them is the fact that I am losing out on potential gains from fast moving other stocks. So lets take a look at what UPS shares are worth considering their latest financial results and the market they operate in.
United Parcel Service (NYSE: UPS) stock valuation
So what do we value UPS shares at considering their latest financial results and their guidance provided in which they stated that they expect diluted earnings per share of around $7.45 for the full financial year. With crude oil prices increases this will affect their margins, if they cant pass on increased transport costs onto consumers.
Based on the financial results, the guidance provided we value UPS shares at $112.50 a share. This will place the group on a PE ratio of 15 and a dividend yield of 3.4%. The PE not being that demanding at $112.50 a share and the dividend yield still being pretty decent. We therefore feel that UPS is offering value at their current price and long term investors looking to get into UPS share should do so at the current levels below our target price.