Shares of United Parcel Service (UPS -0.67%) were up 13% on Thursday afternoon after the transportation giant reported better-than-expected second-quarter results. The company is seeing strong volumes due to the pandemic, and profitability held up better than Wall Street had feared.
Before markets opened, UPS reported adjusted second-quarter earnings of $2.13 per share on revenue of $20.5 billion, significantly above Wall Street consensus estimates for $1.07 per share in earnings on $17.5 billion in sales. As expected, an increase in online shopping due to the pandemic caused volumes to spike higher. UPS said overall volumes were up 20.9%, with domestic up 22.8% and business-to-consumer deliveries up 65% in the U.S.
That residential-delivery business is typically the least profitable UPS operation, and investors and analysts went into the quarter expecting the volumes to be up but assuming earnings would be lower. But UPS was able to keep costs in check, generating a margin on its domestic business of 9.3%, down from 11% a year prior. Overall operating margin fell by just 60 basis points to 11.4%, which set up the earnings-per-share beat.
The same conditions that drove the strong performance in the second quarter should remain in place for the third, which might explain some of the enthusiasm in the stock today. It's also possible that some of the shift toward e-commerce will be permanent, which should help UPS volumes.
There are still some risks investors need to consider. UPS didn't provide guidance for the remainder of the year, saying there's still too much uncertainty surrounding the pandemic and the economic recovery. Also, if the volume surge is permanent, UPS will likely have to make additional investments in its infrastructure to support the traffic to avoid being overwhelmed during the holiday season.
Having to invest in a business because of growth is a good problem to have, and investors are focused on the positive on Thursday, sending shares of UPS soaring higher.