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Earnings Results: UPS stock drops to 6-month low after earnings beat was driven by higher prices, while volumes dropped

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Shares of United Parcel Service Inc. took a hit Tuesday, as the package delivery giant reported profit and revenue that beat expectations despite a “bumpy” macro environment, but only because higher prices masked a drop in delivery volumes.

The stock
UPS,
-2.74%

slumped 2.6% in midday trading, putting them on track for the lowest close since October 2021.

UPS reported before the opening bell net income that was nearly halved, to $2.66 billion, or $3.03 a share, from $4.79 billion, or $5.47 a share, in the same period a year ago, which was boosted by a $2.5 billion pension benefit.

Excluding nonrecurring items, adjusted earnings per share rose to $3.05 from $2.77, to beat the FactSet consensus of $2.89.

Revenue increased 6.4% to $24.38 billion, above the FactSet consensus of $23.82 billion. Among UPS’s business segments, U.S. Domestic Package revenue grew 8.0% to $15.12 billion, international package revenue increased 5.8% to $4.88 billion and Supply Chain Solutions revenue rose 2.0% to $4.38 billion, with all three topping expectations.

Revenue beat forecasts, even as Chief Executive Carol Tomé said on the post-earnings conference call with analysts that average daily volume “fell short of our plan,” as a number of external factors led to a rollercoaster-like quarter.

The company said sales and volumes were hurt in early January by the surge in COVID-19 cases from the omicron variant, then volume growth turned slightly positive as omicron subsided in February, only to have growth rates turn negative late in the quarter because of a combination of historically high inflation, a surge in energy prices and COVID-19-related lockdowns in Asia.

In the U.S., the average daily volume fell 3% from a year ago, as residential volume dropped 7.4%. However, U.S. Domestic Package revenue still grew 8% as revenue per piece increased 9.5%, driven by fuel surcharges and higher base rates.

For the international business, Chief Financial Officer Brian Newman said on the conference call, according to a FactSet transcript, that it was planned for volume to grow, “and it did not.” But international revenue still increased 5.8%, as average daily volume slumped 6.7% but revenue per piece grew 10.5%.

Looking ahead, Newman said he was continuing to pay close attention to macro factors, such as COVID-19, supply-chain constraints, inventory and inflationary pressures and the geopolitical environment. While revenue from Ukraine, Russia and Belarus represented less than 1% of total 2021 revenue, Newman said he was closely monitoring the broader impacts of the war in Ukraine on the global economy.

Despite these uncertainties, Newman said the 2022 guidance for revenue remained at about $102 billion and for operating margin was still about 13.7%. He said, however, that the “path to achieve these financial targets” will be different than when the guidance was first provided in February, as volume growth rates are expected to be lower than previous projections.

“The volume growth rate in the first half of the year is expected to be negative, and we expect it to improve in the second half of the year,” Newman said. “Pricing is expected to remain firm, and we’ll continue to price based on the value we provide to our customers.”

On the bright side, Newman said the 2022 outlook for planned share repurchases was doubled to $2 billion from “at least $1.0 billion.”

UPS’s stock has declined 13.8% year to date, while shares of rival FedEx Corp.
FDX,
-1.60%

have dropped 22.0%. In comparison, the Dow Jones Transportation Average
DJT,
-2.11%
,
of which UPS and FedEx are components, has shed 9.5% this year and the Dow Jones Industrial Average
DJIA,
-1.54%

has lost 7.7%.

Amazon’s ‘Buy With Prime’ doesn’t present much risk

Also on the conference call, Deutsche Bank analyst Amit Mehotra asked how Amazon.com Inc.’s
AMZN,
-3.87%

“Buy With Prime” initiative announced last week, in which Amazon will provide delivery services for some purchases made beyond Amazon’s own website, might eat into UPS’s small- and medium-size businesses (SMB) strategy.

CEO Tomé said UPS has a “very good relationship with Amazon,” which is UPS’s biggest customer.

“As it relates to their latest announcement, we see that as a very clever marketing play by Amazon,” Tomé said, according to a FactSet transcript. “Just putting Amazon Prime badge on an SMB website, if the website even exists, doesn’t present much risk to us, we believe.”

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