UPS stock dives as earnings beat, but U.S. Domestic revenue, outlook come up short

Shares of United Parcel Service Inc. took a dive Tuesday, toward the worst performance in nine months, after the package delivery giant reported overall second-quarter profit and revenue that beat expectations, but did so despite a revenue miss by its largest U.S. business segment.

On the post-earnings conference call with analysts, Chief Financial Officer Brian Newman provided a somewhat downbeat outlook for the U.S. business.

But Newman also said that while the company has “no plans to repurchase shares in 2021 at this time,” it was evaluating the option to buy back stock later this year given “strong free cash flow” and reduced pension liabilities. That’s different from April, when he just said the company had “no plans to buy back stock at this time.”

The stock
tumbled 7.1% in afternoon trading Tuesday, putting it on track to close at a three-month low, and to suffer the biggest one-day selloff since October 2020. That’s enough to make the stock the biggest decliner among the SPDR Industrial Select Sector exchange-traded fund’s
components, and the Dow Jones Transportation Average’s
second-biggest decliner.

The selloff comes after the stock had run up 19.4% over the past three months through Monday, which compares with the 7.9% gain in the shares of rival FedEx Corp.
over the same time, and a 2.1% decline in the Dow transports.

Earlier Tuesday, UPS reported net income for the quarter to June 30 rose to $2.68 billion, or $3.05 a share, from $1.77 billion, or $2.03 a share, in the year-ago period. Excluding nonrecurring items, adjusted earnings per share came to $3.06, to beat the FactSet consensus of $2.81.

Revenue rose 14.5% to $23.42 billion from $20.46 billion, above the FactSet consensus of $23.19 billion.

Among UPS’s business segments, U.S. Domestic revenue grew 10.2% to $14.40 billion, helped by a 13.4% increase in revenue per piece, but was below the FactSet consensus of $14.76 billion. International revenue increased 30.0% to $4.82 billion, topping expectations of $4.57 billion, while Supply Chain Solutions revenue rose 14.3% to $4.21 billion, to beat expectations of $3.85 billion.

Operating margin was 10.9% for U.S. Domestic, 24.6% for International and 12.1% for Supply Chain Solutions.

Looking ahead, CFO Newman said market conditions are expected to remain “favorable,” but said he would keep a close eye on potential risks, such as how the COVID-19 pandemic evolves, inflationary pressures and consumer spending preferences.

Overall second-half 2021 revenue growth is expected to be around 5.4% over the same period a year ago, Newman said. Based on the $46.13 billion in revenue reported in the second half of 2020, and $46.33 billion in revenue reported so far this year, that implies full-year 2021 revenue of about $94.95 billion, which is above the current FactSet consensus of $94.28 billion.

For the U.S. Domestic business, Newman said second-half 2021 revenue growth was expected to be about 8.2%. That implies full-year revenue of $59.76 billion for that business, which is below the current FactSet consensus of $60.22 billion.

Second-half 2021 operating margin for U.S. Domestic is expected to be 9.2%. The reasons operating margin is expected to be lower than the first half include higher compensation expenses, hourly rate adjustments in certain geographies to remain competitive and lower business-to-consumer volumes.

UPS’s stock has rallied 61.1% over the past 12 months, while FedEx shares have advanced 65.9% and the S&P 500 index
has gained 35.7%.

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