United Parcel Service (UPS, Financial), the $95 billion integrated shipping and logistics company, reported 6.2% revenue growth year over year in the first quarter to $15.3 billion and 2.4% profit growth to $1.16 billion, ending with a margin of 7.6% compared to 7.8% in the same period last year.
Profit would have declined secondary to a $936 million increase in operational expenses. Nonetheless, 12.5% lower income taxes helped lift the company’s bottom line in the quarter.
United Parcel Service also reaffirmed its adjusted diluted earnings-per-share (EPS) guidance for fiscal 2017 between $5.80 and $6.10. This would indicate a 3.5% increase at midpoint comparison to the company’s adjusted EPS in the previous year.
“Revenue came in strong this quarter with all segments adding to the top line.
“We are accelerating investments to create the industry’s leading smart global logistics network and value-creating portfolio. UPS customers are benefiting from expanded capacity, choice and improved time-in-transit while technology solutions continue to deliver efficiencies.” – David Abney, UPS chairman and CEO
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Valuations
United Parcel Service is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 28 times vs. the industry median of 18.2 times, a price-book (P/B) ratio of 178.5 times vs. 1.2 and a price-sales (P/S) ratio of 1.6 times vs. 1.1.
It had trailing dividend yield of 2.91% with an 81% payout ratio.
Average 2017 sales and EPS expectations indicated forward multiples 1.5 times and 18.5 times.
Total returns
United Parcel Service has failed to outperform the broader Standard & Poor's 500 index in the past half decade having provided 9.82% (annualized) total returns compared to the index’s 14.99% (Morningstar). The company has also provided 1.84% total losses so far this year while the index provided 10.65%.
UPS
According to filings, United Parcel Service was founded in 1907 as a private messenger and delivery service in Seattle.
Today the company is the world’s largest package delivery company, a leader in the U.S. less-than-truckload industry and the premiere provider of global supply chain management solutions.
United Parcel Service delivers packages each business day for 1.6 million shipping customers to 8.7 million receivers (consignees) in over 220 countries and territories.
The company serves the global market for logistics services, which includes transportation, distribution, contract logistics, ground freight, ocean freight, air freight, customs brokerage, insurance and financing.
United Parcel Service has three reportable segments: U.S. Domestic Package, International Package and Supply Chain & Freight.
U.S. Domestic Package
Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the U.S.
In the recent quarter, revenue in U.S. business grew 5% to $9.54 billion (62% of total revenue). The segment also generated an operating margin of 11.3% compared to 12% the same period last year.
According to filings, operating profit decreased secondary to the net effect of fuel (fuel expense increased faster than fuel surcharge revenue), higher health and welfare costs and higher purchased transportation costs.
International Package
International Package operations include delivery to more than 220 countries and territories worldwide, including shipments wholly outside the U.S., as well as shipments with either origin or destination outside the U.S.
Revenue in international business grew 4.9% to $3.1 billion (20% of sales) in the recent quarter while having delivered a 17% margin (most profitable segment) compared to 19.7% the same period last year.
United Parcel Service explained that it had lower operating profits due to the volatility of both hedged and unhedged currencies. Fuel expenses also had a slight negative impact for the first quarter.
Supply Chain & Freight
Supply Chain & Freight includes United Parcel Service's Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. The company’s forwarding, logistics and Coyote units provide services in more than 195 countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, distribution and post-sales services, mail and consulting services.
In the recent quarter, revenue in the segment grew 12.5% to $2.72 billion (18% of sales) and reported a margin of 6.6% compared to 6.1% in the same period last year.
Sales and profits
In the past three years, United Parcel Service had revenue growth average of 3.2%, profit decline average of 7.8% and profit margin average of 6.38% (Morningstar).
Cash, debt and book value
As of March, United Parcel Service had $2.69 billion in cash and cash equivalents and $17.2 billion in debt with debt-equity ratio 30.8 times compared to 6.2 times in the same period last year. The company has added $1.8 billion year over year while equity (retained earnings) has shrunk by $1.92 billion.
Of United Parcel Service's $38.4 billion assets 14.4%Â were identified as blue sky elements – goodwill and intangible assets. Book value has fallen 77.4% to $560 million –Â resulting in outrageous P/B multiple.
The company also had $10.4 billion in pension and postretirement benefit obligations as of March.
Cash flow
In the recent quarter, United Parcel Service's cash flow from operations fell by 91% in year-over-year comparison to $239 million. In review, minimal difference in cash flow would have otherwise been observed if not for the $2.45 billion increase in pension and postretirement benefit contributions in the recent quarter compared to the year prior period.
Capital expenditures for the period were $938 million leaving United Parcel Service with $699 million in free cash outflow compared to $2.24 billion in the first quarter of 2016. Nonetheless, United Parcel Service still allocated $1.06 billion in payouts, including dividends and share buybacks net any issuances.
According to filings, United Parcel Service repurchased 4.2 million of its shares in the recent quarter at an average price of $107.81 –Â 1.6% lower than the share price of $109.61 (at the time of writing). United Parcel Service repurchased an estimated 25.4 million of its shares at an average price of $105.43 per share in fiscal 2016.
Moreover, the company averaged a free cash flow payout ratio of 128% in the past three fiscal years.
In the recent quarter, United Parcel Service took in $935 million in borrowings net any repayments and other financing activities.
Conclusion
United Parcel Service demonstrated continued growth in its recent quarter operations. The shipping and logistics giant exhibited healthy shipping volume growth with 2.6% increase in its U.S. average daily package volume at 15.6 million and a more impressive 12% rise in international operations at 2.97 million packages.
Nonetheless, the company recorded lower profitability secondary to rise in costs associated with its operations, including foreign currency fluctuations. But more importantly, the company still expected a decent estimated 3.5% growth in its fiscal 2017 EPS.
United Parcel Service exhibited a less attractive balance sheet in the recent quarter – referring to being overleveraged and having reduced retained earnings and high postretirement obligations. Despite these changes, the company still has provided generous payouts to its shareholders.
Twenty-three analysts have an average price target of $113.28 per share –Â 3.3% higher than the share price of $109.61 (at the time of writing). Meanwhile, applying the company’s three-year P/S multiple and revenue growth averages followed by a 20% margin indicated a value of $96.6 per share.
In summary, United Parcel Service is a hold with $110 per share value.
Disclosure: I do not have shares in any of the companies mentioned.
