United Parcel Service Is Delivering Solid Results

Year to date, shares of UPS (UPS) are up 19%. Can UPS continue to deliver?

Headed into the holidays, investors will shift their focus to the delivery companies, like UPS. UPS expects to deliver over 700 million packages, and nearly 30 million packages in the 13 of the 21 days leading up to Christmas. This year, the company is expecting 14% more package volume than last year.

On Oct. 27, UPS reported third-quarter earnings of $1.44 per share, in line with the consensus estimate. Revenue rose 4.9% to $14.72 billion. Domestic revenue increased 4.8% to $9.3 billion. Average daily package volume increased 5.7%, and revenue per package increased 0.9%. Operating profit was $1.3 billion and operating margin was 13.5%, down 10 basis points.

International revenue was $3 billion, up 2.2%. Operating profit increased 14% to $576 million, a third-quarter record. Revenue per package decreased 2.8%. International operating margin was 19%, up 190 basis points.

Supply chain and freight operating margin was 7.9%, down 120 basis points.

UPS continues to benefit from the growth of e-commerce. Ground package volumes rose 5%, next-day air was up 6% and deferred volumes were up 10%.

Management reaffirmed its previous guidance of earnings between $5.70 and $5.90 per share, vs. the consensus estimate of $5.81. Revenue is expected to be up 4.9% to $61.2 billion in fiscal 2016 and 5% in 2017.

Analysts are looking for year-end operating margin improvements in 2016 and 2017 based on higher volumes, improved efficiencies and the benefit of lower fuel prices, while currency exchange rates will shave a couple of percent off of total revenue growth.

This year, earnings before interest, taxes, depreciation and amortization are likely to be $10.5 billion, up 6.5% and up 5% next year. And because of the strong EBITDA growth, I think UPS can continue to deliver solid results.

In terms of valuation, UPS is trading around 18.5 times fiscal 2017 estimates of $6.17, which is towards to low end of its 10-year average multiple. Typically the stock trades between 20 and 23 times forward estimates. If UPS can trade in the middle of the range, I think the shares are worth north of $130.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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