Want To Make Money? Stop Ignoring UPS

About: United Parcel Service, Inc. (UPS)
by: Quad 7 Capital

UPS is not well-followed here at Seeking Alpha.

The stock is up 20% this year but can the run continue?

I investigate recent performance and discuss expectations for the future of the name.

It has been quite some time since I checked in on my buy call on United Parcel Service (NYSE:UPS). I will say that articles on this name are not read widely here at Seeking Alpha and I think that is a mistake. You're missing out on profits. I am sure it is a company we are all familiar with. I initiated coverage on the stock with a buy and encouraged you to stick with the name and to add on a pullback. 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, any economic slowdown could weigh. Right now, I do not foresee this happening. The stock is at all-time highs. Black Friday and Cyber Monday have resulted in this being one heck of a busy week for the company. I have been pleased to see the company having reduced costs thanks to reduced oil prices, and this is likely going to remain a positive catalyst. With the stock at such high levels since initiated coverage, what should we do? Well, to understand if the company is worth buying, we need to examine its recent performance.

The just announced Q3 earnings continue 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 with international exposure. That said, currency exchange rates and lower fuel surcharges pressured total revenue slightly which came in at $14.93 billion. Revenue was up 4.8% year over year on an absolute basis and surpassed estimates by $200 million. However, if we look at revenues on a constant dollar basis, revenues actually grew 5.1%. I contend the company is growing reliably.

To increase revenue, the company has to control its pricing and needs shipping volume. Shipping rates constantly are being adjusted and the company has full control here. Volumes depend on the economy. In conjunction, the two work together to propel revenue higher, but the latter is far more important. On that note, U.S. domestic shipments drove revenues up 4.8% to $9.3 billion. There was a strong 5.7% increase in daily volumes and operating profit domestically jumped to $1.3 billion with operating margins at a very respectable 13.5%.

Internationally, shipments were strong, and on an absolute basis, revenues were up 3.1%. The big take-home internationally, however, was cost controls which led to operating profit jumping 14% to $576 million and operating margin widening. One surprising negative that weighed here was that revenue per package was down by 2.8% and there was strong shipment growth in Asia and Europe. This is critical. Finally, the company's supply chain and freighting revenue was strong, as it was up 8.1% to $2.6 billion. The growth in revenue stemmed from the buyout of Coyote which I documented previously.

How about the actual earnings? Well, it was another good, solid quarter. Earnings came in at $1.44, a 3.6% increase over the same period last year. This was in line with expectations. Further, the company continues to be incredibly shareholder-friendly. So far in 2016, the company has paid dividends of $2 billion. Further, it has repurchased 19.5 million shares for approximately $2 billion. But what matters is the outlook. Thankfully, the company remains optimistic and is investing heavily in its future growth. It still 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. Of course, the company tends to guide conservatively and so I will go on record here and say so I think it will come in at the higher end, especially if holiday volume is on par with last year. This stock is a winner. I'm still a buyer on pullbacks.

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.