On Nov 22, we maintained our Neutral recommendation on United Parcel Service, Inc. (UPS). While the company’s third quarter 2013 earnings were in line with the Zacks Consensus Estimate, revenues fell short of our expectation. Currently, the Zacks Consensus Estimate for the company is pegged at $1.43, representing an annualized growth rate of 8.03%.
UPS is currently looking forwarded to business growth during the holiday season. It expects its peak season sale to exceed beyond Christmas and continue to mid Jan 2014. The company expects to pick up over 34 million packages globally on its peak day, Dec 16. UPS is focusing on enhancing its offering with freight solutions like UPS My Choice, UPS SurePost and UPS Ground, which provide better freight transportation alternatives to its customers during the hectic holiday schedule. The company strongly banks on the rapid growth in e-commerce and expects prolonged holiday shopping for using gift cards, sending return gifts and end-of-the-year sale to result in more freight shipments, translating into higher revenues. Overall, UPS expects peak season daily volume to increase 8% year over year in 2013. For the remainder of the year, the company expects earnings growth to accelerate to a rate of 4% to 13%.
The optimism underpins the company’s strength with respect to its market position and its ability to safeguard shareholders’ value despite unfavorable market dynamics. The company’s financial strength drives growth through planned investments, technology-backed operations and enhanced worldwide network.
However, UPS expects a significant portion of pension headwind in 2013. The company expects pension and health care expenses to increase this year from last year. This will result in substantial cost pressure in 2013. Further, the company expects yield pressure to continue due to the changing business mix resulting from customer shift from premium products as they seek more cost effective logistic solutions. Tax rates are expected to remain at higher levels equating to approximately 36% in the fourth quarter. Further, UPS expects earnings for the yearto be affected by the macroeconomic conditions surrounding the domestic business and its premium B2B business. Headwinds due to currency fluctuations are also expected to cost around $100 million, hurting operating profits in 2013.
In addition,on the international front, the company expects the Euro zone to remain sluggish. Given the heavy expansion plans through acquisition as well as organic growth, we remain wary of the strategies the company is undertaking in terms of its European business. In Asia, economic uncertainty has increased, as China’s GDP and industrial production growth have slowed a bit.
Given these near-term pros and cons, we continue to have a neutral outlook on UPS' performance.