What happened
Shares of United Parcel Service (UPS 2.43%) tumbled this morning, dropping as much as 9.3% by 10:10 a.m. EDT before regaining some of its lost ground. The stock closed the day down 7%.
UPS released its second-quarter earnings report the morning of July 27. Funnily enough, it failed to impress the market despite delivering a stellar quarter. A decline in the company's domestic package volumes has, perhaps, triggered fears of decelerating growth, but investors are clearly missing the bigger picture here.
So what
Here are some notable numbers from UPS's Q2 report:
- Revenue up 14.5% to $23.4 billion.
- Operating margin up to 13.9% from 10.8% in Q2 2020.
- Earnings up 50% to $3.05 per share.
It was, in fact, a record quarter for the package delivery giant as it generated its highest-ever second-quarterly revenue, thanks to strong numbers from both, its U.S. domestic and international packages segments. Its international segment was the star performer, with 30% jump in revenue year over year.
Moreover, UPS generated free cash flow (FCF) worth $6.8 billion during the first half of 2021. That's more than the company's highest annual FCF so far.
So why was the market miffed? I can think of only one reason.
Image source: Getty Images.
UPS's average daily domestic declined 2.9% in Q2. In contrast, it reported 12.8% year-over-year growth in domestic volume in the first quarter. Given the sequential deceleration, it's likely the economy's reopening is hurting UPS. Stay-at-home restrictions and global lockdowns last year had sent demand for e-commerce and package delivery services soaring, so investors are now worried UPS may not see that kind of growth anymore as consumers return to brick-and-mortar stores.
Going by UPS's outlook, though, the market appears to have overreacted today and long-term investors shouldn't have to worry.
Now what
UPS issued the following outlook for 2021:
- U.S. domestic operating margin:10.1% versus 7.3% in 2020.
- Total operating margin: 12.7% versus 9.1% in 2020.
- Return on invested capital: 28%.
- Capital expenditure of $4 billion.
You must also know that UPS repaid debt worth $1 billion in Q2 and has already achieved its debt reduction target of $2.55 billion for 2021. Also, management hinted it may consider share repurchases later this year given its strong cash-flow generation.
Here's the most important takeaway today: In June, UPS outlined encouraging three-year financial goals through 2023, including revenue worth $100 billion at the midpoint, adjusted operating margin between 12.7% and 13.7%, and cumulative FCF worth $25.5 billion. Management stated today it could well hit the higher end of its 2023 targets, thanks to improving business conditions and UPS's ongoing efforts to become a "better, not bigger" company.
