United Parcel Service (UPS, Financial) is one of my favorite stocks. Not because of the way the company latched itself onto explosive e-commerce growth, but mainly because it operates in one of the most capital-intensive industries in the world, yet remains extremely profitable as a company.
UPS reported second quarter earnings per share of of $1.43 on the back of $14.629 billion in revenues - in line with Wall Street's expectations of $1.43 earnings per share on $14.625 billion revenues.
In my recent article titled UPS: One Metric to Watch, I explained in detail why international operations can take the company to a whole new level. In the second quarter, international package revenue increased by 1.1%, while operating profits jumped by more than 11% to $613 million, a much better result compared to the first quarter, when earnings were down by 1.9% and operating profits increasing by 15%. UPS benefited from the Europe to U.S. trade lane that increased at a double-digit pace, while export shipments increased across all product categories.
UPS has been laser-focused on improving efficiency and it is encouraging for investors to see a company take that much effort to improve bottom line profits instead of sitting on the laurels of steady domestic revenue growth driven by elevated demand from the business to consumer segment.
Operating profits increased by 4% during the quarter, from $1.96 billion last year to $2.038 billion this year, while second quarter revenues increased by 2.4% from $14.095 billion last year to $14.629 this year. Operating margins are nearing 14%, a significant improvement compared to 13.1 % and 8.5% the company recorded in fiscal years 2015 and 2014.
UPS reiterated its full-year outlook and expects diluted earnings per share of $5.70 to $5.90 for fiscal 2016.
"We feel very comfortable that the guidance we set earlier in the year is where we'll end for the year," Richard Peretz, Chief Financial Officer at UPS told CNBC's "Squawk on the Street" Friday. "It's international that's outperforming, that's allowing us to maintain the guidance."
In summary, it is their domestic operations that will give maximum gains for the full fiscal, but at the operational level, their efficiency continues to clock record numbers. As an investor, this is exactly what you want to see.
The pressure from the FedEx (FDX, Financial)-TNT deal is yet to be felt, but I am of the opinion that UPS has the kind of granular operational capability to manage the threat and keep its impact to a minimum. Besides, the full impact of the deal will only be felt after the two rivals fully integrate their operations in the U.S. and internationally, giving UPS ample time to execute counter measures.
Disclosure: I/we have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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