Morningstar | UPS Misses Consensus Expectations, Normalized Results Flattish; Maintain our FVE
The market may frown on UPS’ slight revenue and earnings miss, but nothing in its first-quarter earnings report was much of a surprise to us, and we maintain our valuation assumptions and wide moat rating. Overall revenue was flat year over year and operating income (excluding restructuring costs) was also flat, with the 8% decline in adjusted EBIT in domestic offsetting a 24% increase in supply chain and freight. Management affirmed its existing guidance, which implies double-digit operating profit growth in all three segments this year, and emphasized execution of its strategic plans. We note four key takeaways.First, UPS managed costs well despite a harsh winter, with domestic unit cost growth of about 2.4% the lowest in "many quarters." Capacity additions in coming quarters may pressure margins through startup costs but will prove useful in peak season. The in-progress voluntary retirement plan will reach full run rate in July, saving $200 million on an annualized basis, albeit at an unspecified cost, so core margins have some possibility to improve in coming quarters.
Second, the domestic segment handled solid 2.2% volume growth, led by strong 7.8% year-over-year growth in average daily volume of air products. However, transformation charges and severe weather dragged down domestic EBIT 12%. Third, international grew packages just under 1%'; reported EBIT declined 11%, but excluding transformation costs improved 3% to reach a new high. Finally, supply chain and freight increased operating profit 18% (24% excluding restructuring) even though revenue declined 4%, mostly due to 12% lower forwarding sales.
In sum, UPS increased overall volume 40 basis points year over year and improved consolidated revenue per piece 100 basis points, and while reported EBIT declined 8%, adjusted EBIT slid just 20 basis points. Results may appear uninspiring, but 2019 is a period for UPS to advance its margin initiatives, and some will begin to bear fruit this year.
United Parcel Service provides transportation services, primarily domestic and international letter and package delivery. The company reports its operations in three segments: United States Domestic Package, which includes the time-definite delivery of letters, documents and packages throughout the United States; International Package, which includes delivery to several countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States; and Supply Chain & Freight, which includes the company's Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units.
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