Second Quarter Results
United Parcel reported second quarter earnings per share of $1.15, up 7.5% compared to the second quarter of 2011. Earnings missed analysts estimates of $1.17 per share. Revenues rose 1% to $13.3 billion, again coming in below analysts expectations of $13.7 billion. Operating earnings rose 2% to $1.79 billion. Gross margins expanded by 20 basis points to 13.4%. The company shipped 15.4 million packages on average per day. United Parcel still expects that the acquisition of TNT will be closed in the fourth quarter of 2012.
Scott Davis, CEO and Chairman, commented on the results. "Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion."
US Domestic Package
Domestic revenues rose 4.1% to $8.06 billion, driven by a 3.5% increase in package volume. Operating profits rose 12% to $1.13 billion as operating margins expanded by 120 basis points to 14.1%. Margin expansion was the result of volume growth, efficiency, higher base rates and timing of fuel surcharges.
Revenues fell 4% to $3.01 billion as a result of weaker global economic growth, lower Asian exports and a strong US dollar. Operating profit fell to $454 millions as margins compressed by 100 basis points to 15.1%. The company did post modest growth in Europe, offset by double digit declines in export from Asia to the US.
Supply Chain & Freight
Revenues for the supply chain and freight division fell 1.6% to $2.28 billion as a result of slower air freight demand and lower pricing. Operating profits increased slightly from last year's adjusted profits to $202 million, resulting in a 50 basis point increase in the adjusted operating margin.
CFO Kurth Kuehn commented on the outlook for the remainder of the year. "As we look toward the second half of the year, customers are more concerned as greater uncertainty exists. Additionally, economic growth expectations have come down."
As a consequence, United Parcel reduced its full year guidance for diluted earnings per share to $4.50-$4.70, still up 3% to 8% compared to 2011.
United Parcel ended its second quarter with approximately $7.3 billion in cash and equivalents ahead of the acquisition of TNT. For the first six months of 2012, the company generated approximately $26.5 billion in revenues on which it generated net profits of around $2.1 billion. For the full year the company is on track to generate roughly $53 billion in total revenues on which it is expected to earn around $4.5 billion.
This values United Parcel at 1.3 times annual revenues and around 16 times earnings. This premium valuation compares to a revenue multiple of 0.7 times for its main competitor FedEx (FDX), which trades at 14 times annual earnings.
Currently United Parcel pays a quarterly dividend of $0.57 per share for an annual dividend yield of 3.1%
Shareholders in United Parcel had a rough day. The bellwether of the global economy saw its shares falling 4.6%, with shares trading flat year to date. The company has been struggling to live up to its expectations as shares have returned a mere 10% over the last decade. This return calculation excludes its annual dividend yield.
Today's result highlight that the company remains heavily dependent on the global economy and the major economies are all weakening at the same time. A positive sign is continued strength in the US market, most likely driven by the trend towards more online shopping, driven by the likes of Amazon.com (AMZN). Worrying is that Asian air capacity is cut by another 10%.
In the long term the addition of TNT will result in more geographic diversified operations. In the meantime worries about the prospects of the Eurozone keep mounting and with a premium valuation I see few triggers for a short to medium term outperformance in shares. Shares need to see a significant decline of double digit percentages before I would consider taking a long position. If I had to invest in the sector my preference would go towards Fedex, even as the company missed out the TNT acquisition.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.