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How Deep Will be the Coronavirus Impact on UPS Q1 Earnings?

Zacks Equity Research

United Parcel Service UPS is scheduled to release first-quarter 2020 results on Apr 28, before market open.

Notably, the company’s earnings surpassed estimates in three of the last four quarters, missing the mark in one.

United Parcel Service, Inc. Price and EPS Surprise


United Parcel Service, Inc. Price and EPS Surprise

United Parcel Service, Inc. price-eps-surprise | United Parcel Service, Inc. Quote

Against this backdrop, let’s delve into the factors that might have impacted the company’s performance in the March quarter.

UPS’ first-quarter performance is likely to have been hurt by sluggish shipment of goods due to the coronavirus-induced supply-chain disruptions. During the Raymond James  & Associates’ Institutional Investors Conference on Mar 3, UPS’ chief financial officer Brian Newman stated that "the business obviously slowed" due to the global health peril and it might have hampered shipment of goods, which in turn, is expected to have affected the company’s to-be-reported quarter’s performance.

The weak air freight market due to lackluster demand from China is another negative as UPS has significant exposure to the country. Also, the extended closure of factories in the region due to the COVID-19 outbreak is likely to have dented freight volumes in the March quarter. Global supply chains are expected to have been disturbed by the shortage of raw materials, parts and supplies.

Consequently, the Zacks Consensus Estimate for International Package revenues is currently pegged at $3,467 million, indicating an 8.5% decline from the figure reported in fourth-quarter 2019. Disruptions due to the coronavirus pandemic are also likely to have upset the performance of UPS’ main revenue generating segment, U.S. domestic package. The Zacks Consensus Estimate for U.S. domestic package revenues currently stands at $11,172 million, suggesting a 16.7% drop from the figure reported in fourth-quarter 2019. Moreover, the consensus mark for average daily package volumes implies a 21.5% sequential decrease.

Trend in Earnings Estimate Revision

The Zacks Consensus Estimate for first-quarter 2020 earnings stands at $1.23 per share, indicating an 11.5% fall from the year-ago reported figure. With the coronavirus outbreak dealing a severe blow to the company, estimates for first-quarter earnings per share have been revised 13.4% downward over the past 60 days.

Earnings Whispers

The proven Zacks model does not conclusively predict an earnings beat for UPS this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. However, that is not the case here as elaborated below. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings ESP: UPS has an Earnings ESP of -2.33% as the Most Accurate Estimate is pegged at $1.20, 3 cents below the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: UPS currently carries a Zacks Rank #4.

Highlights of Q4 Earnings

UPS' earnings (excluding $2.23 from non-recurring items) of $2.11 per share edged past the Zacks Consensus Estimate by a penny. The bottom line also increased 8.8% year over year, primarily owing to impressive volume growth in the U.S. Domestic segment. However, UPS generated revenues of $20,568 million in the quarter, falling short of the Zacks Consensus Estimate of $20,578.5 million.

Stocks to Consider

Here are a few stocks worth considering from the broader Zacks Transportation sector as our model shows that these have the right combination of elements to beat estimates this reporting cycle.

Covenant Transportation Group CVTI has an Earnings ESP of +10.00% and a Zacks Rank #3.

Trinity Industries TRN has an Earnings ESP of +7.14% and a Zacks Rank of 3.

Golar LNG Limited GLNG has an Earnings ESP of +1,100.00% and  is Zacks #3 Ranked.

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