UPS: Q3 Earnings Could Rise despite Soft Global Trade

United Parcel Service (UPS) plans to report its Q3 earnings results on October 22. The company has a decent earnings surprise history, beating analysts’ expectations in 11 of the last 12 quarters. Analysts’ top- and bottom-line estimates suggest that United Parcel Service could report impressive Q3 results.

Wall Street projects UPS’s third-quarter profits to increase 13.2% year-over-year to $2.06 per share. The company’s YoY growth expectation is much better than what it had registered in the first two quarters of 2019. In the first quarter, UPS’s EPS fell 10.3%, while its second-quarter EPS rose 1% YoY. Analysts’ Q3 earnings growth forecast also matches its 2018 double-digit increase level.

Factors to drive UPS’s Q3 earnings

Higher revenues and efficient cost management could aid United Parcel Service’s third-quarter bottom-line results. Wall Street analysts forecast its third-quarter revenues to grow 5.2% YoY to $18.4 billion. Increased freight rates and higher domestic volumes are expected to be the main drivers for its top-line growth.

UPS raised its general freight rate in February by 5.9%. Furthermore, United Parcel Service has registered high-single-digit growth in domestic air volume in the last two quarters. We expect that a stable US economy would have supported the air volume growth in the third quarter as well.

Additionally, United Parcel Service’s third-quarter results should benefit from robust e-commerce growth. The company’s recently launched next-day air and ground courier services are helping it garner market share in the e-commerce delivery market.

UPS witnessed a 30% YoY increase in next-day air volume during the second quarter, primarily due to strong demand from e-commerce shippers. According to eMarketer’s forecast, the global e-commerce market could grow 20.7% YoY to $3.54 trillion in 2019.

Soft international trade to hurt UPS’s Q3 earnings

Nonetheless, an economic slowdown in Europe and Asia could negatively impact United Parcel Service’s overall third-quarter performance. Logistics volume in the European market has been affected by negative manufacturing output in Germany.

Plus, the Asian market is witnessing softening trade due to trade tensions between the US and China. Notably, in the second quarter, UPS reported a 2.7% decline in the International segment’s revenues as soft global trade hurt volumes.

Peers’ expectations

Among UPS’s top peers, only FedEx (FDX) reported its first-quarter fiscal 2020 earnings results on September 17. The company’s top- and bottom-line results not only missed analysts’ expectations but also plunged on a year-over-year basis. FedEx, UPS’s primary rival, is also suffering from global trade and production slowdown. FedEx’s Q1 of fiscal 2020 revenues from international operations fell 3% YoY, mainly due to a 1.8% decline in international volume.

Other major logistics companies plan to report their earnings results in the coming weeks. Wall Street’s estimates for UPS’s competitors suggest that the majority of logistic stocks would bear the brunt of global trade slowdown.

Analysts expect Old Dominion Freight Line’s (ODFL) third-quarter revenues and earnings to remain almost flat YoY. The company plans to report its quarterly results on October 24.

Peer XPO Logistics’ (XPO) revenues could fall 1.5% YoY. However, analysts expect its earnings to rise 16.9% YoY when it reports its third-quarter results on October 28.

Stock performance

UPS stock has outperformed the major US indexes year-to-date. The stock has gained 20.5%, while the Dow Jones and the S&P 500 have risen 15.6% and 19.3%, respectively.

UPS stock’s YTD return is also higher than the gains of the iShares Transportation Average ETF (IYT). The ETF, which invests about 20% of its funds in air freight and courier services stocks, is up 13.6% YTD.