UPS Quarterly Earnings: By the Numbers

UPS delivery truck, Celebration, Florida, USA
Ian Dagnall/Alamy
UPS (UPS), which is often viewed as a bellwether for the state of the U.S. economy, posted a higher-than-expected third-quarter profit, driven by rising U.S. consumer and business demand, plus strong growth in Asia. The largest jump in U.S. growth came from e-commerce, which now accounts for almost half of UPS's domestic packages.

As UPS approaches the crucial fourth quarter holiday season, it is again the focus of controversy about whether it will be able to meet customer demand. Last year, the company's delivery capacity was overwhelmed, and packages that the carrier promised to deliver by Dec. 24 wound up delayed after large numbers of shoppers rushed to take advantage of retailers' final deals.

UPS, the world's largest package delivery company, posted quarterly revenue up 6 percent from $13.5 billion last year, and Earnings per Share (EPS) of $1.32, up 14 percent from $1.16 a year earlier.

This earnings release follows the earnings announcement of its peer, FedEx Corporation (FDX).

  • Summary numbers: Revenues of $14.3 billion, Net Earnings of $1.2 billion and Earnings per Share (EPS) of $1.32.
  • Performance focus on earnings: rise in earnings of 10.7 percent, better than increase in revenues of 5.6 percent compared to same period last year
  • Gross margins now narrowed to 13.7 percent from 24.3 percent compared to the same period last year, operating margins now 13.7 percent from 16.9 percent

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):
Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014
Revenue Growth (YOY)3.8%3.1%2.5%5.6%5.6%
Earnings Growth (YOY)133.9%166.8%-12.2%-57.6%10.7%
Net Margin8.1%7.8%6.6%3.2%8.5%
Return on Equity120.5%92.0%57.2%30.7%86.9%
Return on Assets11.8%12.7%9.9%5.0%13.9%

Market Share Versus Earnings Growth

Because there is sometimes a tension between companies' focus on growing market share versus growing earnings, Capital Cube examines revenue growth to understand a company's ability to increase its market share, and earnings growth to look at the company's ability to generate returns.

UPS' improvement in revenue compared to the same period last year of 6 percent trailed its earnings' performance, which was up 10.7 percent. The company's earnings performance this period suggests an effort to boost the bottom-line. While this is good to a point, the fact that the company's revenue increase was less than average among the results announced thus far of its peers, causes Capital Cube to sound a cautionary note from a long-term market share perspective. Also, compared to the second quarter, third quarter revenues changed by 0.07 percent and earnings by 167.4 percent.

Earnings Growth Analysis

The company's earnings have gone up from the same period last year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations – gross and operating margins are both currently at 13.7 percent. Compared to the same period last year, gross margins were 24.3 percent and operating margins 16.9 percent. Looking back to the quarter ended June 30, 2014, gross margins were 16.5 percent and operating margins 8.6 percent.

Gross Margin Trend

Capital Cube probes for companies trading off improvements in revenues and margins by extending friendlier terms to customers and vendors, by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company's performance is a result of truly delivering in the marketplace and not simply an accounting gimmick using the balance sheet.

UPS' decline in gross margins – from 24.3 to 13.7 compared to the same time last year – is offset by some improvements on the balance sheet side. Specifically, working capital management shows progress. The company's working capital days dropped to 25.5 from 40.3 for the same period last year, which suggests that the gross margin decline is not altogether bad.
The company's pretax margins are now 13.1 percent compared to 12.7 percent for the same period last year

EPS Growth Versus Earnings Growth

UPS's rise in Earnings per Share (EPS) of 13.8 percent compared to the same period last year is better than its increase in earnings of 10.7 percent. However, this change in earnings is lower than the average among the results announced to date by its peer group, warning us that the company may lose ground in generating profits in this group.

Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014
Revenue Growth (YOY)3.8%3.1%2.5%5.6%5.6%
Peer Average Revenue Growth (YOY)3.0%2.9%2.9%4.6%5.8%
Earnings Growth (YOY)133.9%166.8%-12.2%-57.6%10.7%
Peer Average Earnings Growth (YOY)70.3%90.6%-3.6%41.7%17.2%
Gross Margin24.3%23.5%21.9%16.5%13.7%
Peer Average Gross Margin25.0%24.7%23.4%22.4%20.1%
EBITDA Margin16.9%15.9%14.4%8.6%13.7%
Peer Average EBITDA Margin14.9%14.4%12.9%12.1%13.8%
Net Margin8.1%7.8%6.6%3.2%8.5%
Peer Average Net Margin6.3%6.1%5.0%4.7%6.8%
Peer Average EPS$1.35$1.41$1.11$1.48$1.71
Return on Equity120.5%92.0%57.2%30.7%86.9%
Peer Average Return on Equity65.8%51.7%33.2%24.9%51.4%
Return on Assets11.8%12.7%9.9%5.0%13.9%
Peer Average Return on Assets8.8%9.3%7.3%7.0%10.7%

Company Profile

United Parcel Service, Inc. is a logistics company, which provides global package delivery and supply chain management services. It offers logistics services to the global market, which include transportation, distribution, forwarding, ground, ocean and air freight, brokerage and financing. The company operates its business through three segments: U.S. Domestic Package, International Package and Supply Chain & Freight. The U.S. Domestic Package segment provides in time-definite, money-back guaranteed, small package delivery services and also offers spectrum of U.S. domestic guaranteed ground and air package transportation services. The International Package segment offers a wide selection of guaranteed, day and time-definite international shipping services. The Supply Chain & Freight segment consists of its forwarding and logistics services, UPS Freight business, and its financial offerings through UPS Capital. United Parcel Service was founded by James E. Casey and Claude Ryan on August 28, 1907, and is headquartered in Atlanta, Georgia.

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