United Parcel Service (UPS -1.35%) reported another fantastic quarter on Wednesday as America's largest industrial stock by market capitalization continues to outpace expectations. Despite good results, shares of UPS finished the day down 8.8% on the news.
Let's break down each of UPS' segments to see how the company is doing and determine if the market was wrong to sell off the stock.
Image source: Getty Images.
Overall results
Overall results were exceptional. UPS grew revenue by 15.9%, operating profit by 9.9%, and earnings per share by 10.1% from the year-ago quarter, representing even better growth than it achieved in the second quarter.
|
Q3 2020 |
Q3 2019 |
Change |
Q2 2020 |
Q2 2019 |
Change |
|
|---|---|---|---|---|---|---|
|
Total Revenue |
$21.25 billion |
$18.32 billion |
15.9% |
$20.47 billion |
$18.05 billion |
13.4% |
|
Total Operating Profit (Adjusted) |
$2.41 billion |
$2.19 billion |
9.9% |
$2.32 billion |
$2.16 billion |
7.4% |
|
Total Operating Margin (Adjusted) |
11.3% |
12% |
(5.8%) |
11.4% |
12% |
(5%) |
|
Earnings Per Share (Adjusted) |
$2.28 |
$2.07 |
10.1% |
$2.13 |
$1.96 |
8.7% |
Data source: United Parcel Service
The company's adjusted free cash flow (FCF) so far this year is $5.9 billion, which is plenty to cover $3.4 billion or so in annual dividend payments. UPS has grown its dividend more than five-fold over the past 20 years and yields 2.6%. Its strong FCF and dividend raises make it one of the safest industrial dividends right now.
U.S. domestic
UPS' U.S. domestic results are one of the main reasons the stock sold off on Wednesday. Although revenue was over 15% higher than the same period last year, a 20% hit to the operating margin resulted in 9% lower profit from the U.S. segment.
|
Q3 2020 |
Q3 2019 |
Change |
Q2 2020 |
Q2 2019 |
Change |
|
|---|---|---|---|---|---|---|
|
U.S. Domestic Revenue |
$13.23 billion |
$11.46 billion |
15.5% |
$13.07 billion |
$11.15 billion |
17.2% |
|
U.S. Domestic Operating Profit (Adjusted) |
$1.13 billion |
$1.24 billion |
(8.9%) |
$1.22 billion |
$1.23 billion |
(0.8%) |
|
U.S. Domestic Operating Margin (Adjusted) |
8.6% |
10.8% |
(20.4%) |
9.3% |
11% |
(15.5%) |
Data source: United Parcel Service
UPS management attributed lower profits to the 7.8% decrease in business-to-business (B2B) volume and an 18.4% increase in expenses. Expenses rose because the company expanded routes and grew weekend shipping in an effort to lean into small and medium-sized business (SMB) sales. To its credit, domestic average daily volume rose 13.8% and SMB volume grew 18.4% in the quarter.
International
Unlike the mixed bag of UPS' domestic results, the international segment was an all-around success. The third quarter of 2020 was a record one for international operating profit, which rose 40% compared to the same period last year.
|
Q3 2020 |
Q3 2019 |
Change |
Q2 2020 |
Q2 2019 |
Change |
|
|---|---|---|---|---|---|---|
|
International Revenue |
$4.09 billion |
$3.49 billion |
17.2% |
$3.71 billion |
$3.51 billion |
5.7% |
|
International Operating Profit (Adjusted) |
$972 million |
$693 million |
40.3% |
$842 million |
$665 million |
26.6% |
|
International Operating Margin (Adjusted) |
23.8% |
19.8% |
20.2% |
22.7% |
19% |
19.5% |
Data source: United Parcel Service
Margins improved 20% thanks to a 37.6% increase in average daily volume growth out of Asia and lower jet fuel costs. UPS added 268 flights due to high demand.
Supply chain and freight
Similar to its international segment, supply chain and freight benefited heavily from more air and ocean freight shipments from Asia. The company highlighted the retail and industrial sectors as the main growth drivers out of Asia.
|
Q3 2020 |
Q3 2019 |
Change |
Q2 2020 |
Q2 2019 |
Change |
|
|---|---|---|---|---|---|---|
|
Supply Chain and Freight Revenue |
$3.93 billion |
$3.37 billion |
16.6% |
$3.68 billion |
$3.39 billion |
8.6% |
|
Supply Chain and Freight Operating Profit (Adjusted) |
$302 million |
$256 million |
18% |
$267 million |
$273 million |
(2.2%) |
|
Supply Chain and Freight Operating Margin (Adjusted) |
7.7% |
7.6% |
1.3% |
7.3% |
8% |
(8.8%) |
Data source: United Parcel Service
Unlike the second quarter, which saw operating profit and operating margin fall on a year-over-year basis, the third quarter saw over 16% higher revenue, 18% higher profit, and a slight increase in operating margin. UPS noted that its supply chain and freight segment benefited from a rebound in global economic activity.
Looking ahead
UPS declined to issue fourth-quarter revenue and earnings guidance on the grounds that too much uncertainty remains. However, CFO Brian Newman noted that the company expects volume and revenue to increase in the fourth quarter.
Another likely reason the stock sold off is due to UPS' profit margin guidance. The company noted that the profit margin could be pressured due to an additional $150 million to $200 million of payroll-related expenses as the company hired more employees in the second quarter. The transportation giant also mentioned the likely absence of a $150 million 2019 alternative fuel tax credit, which could strain the margin further.
Given management's fourth-quarter predictions, and the difficult comparisons to the fourth quarter of last year, the company is unlikely to have the blowout results that it did in the second and third quarter. However, overall top- and bottom-line growth and record international profits were impressive. Even with mediocre fourth-quarter results, UPS is likely to notch a very impressive earnings year. And with a reliable and growing dividend, UPS is well positioned to be a premium industrial stock worth owning over the long term.
