United Parcel Service (UPS 0.20%) had another fantastic quarter, posting record international profit and double-digit revenue and earnings growth. But shares still fell 8.8% on Wednesday as concerns of declining U.S. profitability and guidance for lower profit margins in the fourth quarter outweighed the good news from the third quarter.
UPS' earnings call was chock-full of impressive results and predictions for future earnings growth. Let's look behind the numbers to determine if Wall Street was wrong to sell UPS and what could drive the stock higher in the future.
Another blowout quarter
Similar to its second quarter, a surge in residential demand from e-commerce and small and medium-sized businesses (SMB) led to record revenue for UPS. Compared to the third quarter of 2019, revenue was up 15.9%, adjusted operating profit increased 9.9%, and adjusted earnings per share were up 10.1%. UPS' weekend ground volume rose 161%.
The headline story for UPS throughout the pandemic has been its surge in residential deliveries as folks steer clear of in-person shopping in favor of online vendors. UPS now forecasts that e-commerce sales will comprise more than 20% of U.S. retail sales this year. "We don't think the penetration of e-commerce retail sales will decline, even after the pandemic, but it isn't just retail. Our customers across all business segments are reinventing the ways they do business," said UPS CEO Carol Tome. Tome's notion that e-commerce trends are here to stay is big news for the company. It signals that management believes some behaviors from the pandemic aren't just temporary bumps for the business.
One of the more subtle takeaways from UPS' third-quarter earnings was its SMB volume growth. SMB volume grew 25.7% on the company's Fastest Ground Ever lanes, helping to offset declines in commercial deliveries from larger businesses. Overall, SMB volume grew 18.7%, the highest rate in 16 years.
Management attributes a good portion of the SMB growth to its Digital Access Program (DAP). DAP allows smaller businesses to create a UPS account and share in many of the benefits larger shippers enjoy. UPS added 150,000 new DAP accounts in the third quarter and 120,000 in the second quarter.
So far during the pandemic, UPS is proving that higher residential sales and engagement from SMBs can more than offset declines in commercial volumes.
Another under-the-radar detail from the company's earnings call was the positioning of its healthcare business. Healthcare and automotive were the only business-to-business (B2B) segments that grew during the quarter -- although that growth wasn't enough to offset declines in the industrial sector.
The transportation giant has gradually ramped up UPS Premier, its critical healthcare shipment service. UPS Premier, along with the broader line of UPS Healthcare, spans all of UPS' segments.
Leaning into the needs of the healthcare industry could be a natural fit for UPS as it expands its ground and air services to accommodate higher-volume residential and SMB deliveries. The company also made it clear that it's ready to handle the logistical side of COVID-19 vaccine distribution. CEO Tome had the following to say about UPS Healthcare and the pandemic:
[The] healthcare team is supporting clinical trials across all stages for COVID-19 vaccines. Early involvement gives us valuable data and insights to design commercial distribution plans and manage the logistics for these complex products. We have a great opportunity and, frankly, a great responsibility to serve the world when a COVID-19 vaccine becomes available. When that time comes, our global network, cold chain solutions, and our people will be ready.
Tailwinds that are here to stay
Similar to other pandemic-related tailwinds, it's easy to attribute UPS' recent success to temporary factors that could fade as the pandemic ends. However, UPS management is confident that there could be long-term benefits to growing its shipping network, most notably an ongoing rise in e-commerce, the integration of SMBs into its customer base, and a time-sensitive medical business that could continue to serve the needs of the healthcare industry for years to come.
In the meantime, it's worth reiterating just how impressive UPS' third-quarter results were during a time when many other industrial stocks are struggling. UPS recently soared to a new 52-week high but has since come down along with the rest of the market. Given the stock's sell-off, long term potential, and 2.6% dividend yield, UPS looks to be a good option right now.