United Parcel Service: What Now?

| About: United Parcel (UPS)

Summary

We are all familiar with UPS and I initiated coverage last fall.

Q4 earnings are out and I discuss the key metrics.

I discuss expectations for 2016 and what to expect.

United Parcel Service (NYSE:UPS) is a company we are all familiar with. In fact, it serves over 220 countries. The company has also bought other companies over the years to grow, most recently completing the acquisition of Coyote Logistics last year and that move could create more than $100 million of synergies. I recently initiated coverage on the stock and encouraged you to stick with the name and to add on a pull back. The great January selloff of 2016 as some are calling it knocked this stock down along with so many others. Some of this selloff was due to concerns over a slowing economy, and recent GDP numbers confirm the growth is lackluster. The fact is that UPS relies on a vibrant economy to ensure that it has packages to ship. The advent of online shopping was perhaps the greatest catalyst for the company in recent memory, but with results getting better and better each year, a slow down could weigh. The company has seen reduced costs thanks to reduced oil prices, however (barring any contracts in place locking in price), and this is likely going to remain a positive catalysts. With the stock well under $100 and down about 7 points from where I initiated coverage, is now the time to consider the stock?

First, let me say that the oil price catalyst is short term, that is, reduced prices won't last forever. With proper strategy, the company may be able to lock-in low prices for years to come, but we cannot reasonably expect prices to stay deflated forever. That said, I do not see any pending catalysts to shoot prices higher based on inventories and output. So that is good for UPS. That said, to understand if the company is worth buying, we need to examine its recent performance.

I actually interpreted the just announced Q4 earnings to be solid. But like many other companies with business overseas, revenues have been pressured thanks to a very strong dollar. The currency issue has simply plagued domestic companies. That said, currency exchange rates and lower fuel surcharges pressured total revenue slightly which came in at $16.05 billion. Revenue was up 0.9% year over year on an absolute basis but missed estimates by $230 million. However, if we look at revenues on a constant dollar basis, revenue actually grew 2.4%. Now, some may still see this as disappointing, but I contend the company is growing reliably. And as such, it is a reliable investment. Revenue was able to rise thanks to initiatives across the business that management instituted and that resulted in base rate improvements, helped also by a strong holiday shopping season.

So how can the company improve revenues? Well, first it has pricing power. Rates constantly are being adjusted. Second, it needs higher volume. In conjunction, the two work together to propel revenue higher, but the latter is far more important. If you don't have the volumes, no matter what you charge, the company has no shot. On that note, total company shipments increased 1.8% over last year's comparable quarter to 1.3 billion packages, led by U.S. air products and European cross-border shipments. U.S. domestic shipments drove revenues up 2.6% to $10.3 billion. There was a 2.4% increase in daily volumes. Internationally, shipments were strong, but on an absolute basis, revenues were down 7.3% to $3.18 billion. Controlling for exchange issues, the revenues were still down. The big take home internationally, however, was cost controls which led to operating profit jumping 16% to $624 million and operating margin widening. This is critical. Finally, the company's supply chain and freighting revenue was strong, as it was up 6% to $2.6 billion. The good news is that even with a takeover of Coyote, operating profit increased here to $199 million an improvement of 11%.

How about the actual earnings? Well, these came in at $1.57, a whopping 26% increase over the same period last year. This beat expectations by $0.15. All three of the company's business segments expanded operating margins and generated significant operating profit growth. I think the company is doing extremely well. With the pullback, shares now yield 3.1%. The company paid dividends of $2.5 billion, an increase of 9.0% per share over the prior year. Further, it has repurchased 27 million shares for approximately $2.7 billion.

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Source: thedeadlyimageshade.com

Now here is the key. What can we expect for 2016? Although we don't know where oil is going or the overall economy, the company remains optimistic and is investing heavily in its future growth. What can we expect? Well, UPS issued guidance for 2016. It expects to see diluted earnings per share of $5.70 to $5.90, an increase of 5% to 9% over adjusted 2015 results. This represents anywhere from a 7 to 10% growth rate. That is not bad. Of course, the company tends to guide conservatively, and so I will go on record here and say so long as there is not a catastrophic slow down, I think the company can easily hit $6.00 per share in 2016, depending on buybacks and expenses.

All things considered, the stock pays a great dividend, shipment volumes are up, the company is shareholder friendly, and the economy continues to be strong enough to guarantee UPS' services will always be in demand. Oil, in my opinion, is a distraction. Let's not forget UPS was making money hand over fist with $100 oil, and even though I see no catalyst for oil prices in the near future, I do not see the company struggling should prices normalize. This stock is a winner. I'd be a buyer here.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.