UPS Jumps Most Since 2008 as Expansion Shows Early Success

(Bloomberg) -- United Parcel Service Inc. rose the most in more than 10 years after beating its own profit guidance, an early sign that a three-year, $20 billion expansion plan is paying off by keeping rising costs in check.

Chief Executive Officer David Abney had promised investors they’d begin to see benefits later this year from his strategy to reduce residential delivery costs and increase business-to-business packages, which are more profitable. Shares tanked when he unveiled the plan in early 2018.

Investors got a confidence boost Wednesday after UPS reported adjusted earnings of $1.96 a share in the second quarter, better than the company’s prediction in April that profit would be “relatively flat” with the $1.94 it reported a year earlier. Analysts had expected $1.93.

Shares jumped 8.4% to $114.14 at 10:45 a.m. in New York after earlier rising as much as 9%, the most intraday since Oct. 28, 2008. UPS posted the second-highest gains on the S&P 500 Index, which was little changed overall.

Profit margins also improved, UPS said in a statement.

“We were really able to bend the cost curve down at the same time that volume and revenue went up,” Abney said in an interview. The results show “we absolutely can get the returns we want on e-commerce.”

UPS emphasized its momentum with a slate of new initiatives announced Tuesday, including a move to seven-day deliveries in 2020 and next-day ground service. The courier continued its expansion of package drop-off and pick-up locations, including 6,000 CVS drugstores. Abney pledged to roll out more actions to drum up more business and boost efficiency.

The company is under pressure to improve profit margins that have slipped as residential deliveries skyrocket in the e-commerce boom. Longtime customer Amazon.com Inc. has become a rival as the e-commerce giant starts its own shipping service, promising one-day delivery for top customers. UPS expanded its total operating profit margin by 0.3 percentage point.

UPS’s new automated sorting hubs are about 35% more efficient than older ones. The courier is also improving its driver-navigation tool. Those productivity gains, coupled with the full savings impact of a voluntary retirement plan beginning in July, should boost profit in the second half of this year, helping UPS meet its full-year earnings target of at least $7.45 a share.

What Bloomberg Intelligence Says:

“UPS has pulled investments forward to increase technology and automation use to mitigate mix-driven margin compression as part of the company’s transformation plan. Risks to UPS delivering on its 2019 EPS guidance of $7.45-$7.75 are subsiding, in our view, given the strong 2Q performance.”

--Lee Klaskow, Freight transportation analyst
Click here to read the research.

The U.S. domestic business drove second-quarter profit with revenue rising 7.7%, boosted by a 30% surge in next-day volume. Profit margins rose 8% as the new sorting hubs held costs in check. At the supply chain and freight unit, operating profit jumped more than 10% even as sales declined.

The international businesses was buffeted by a U.S.-China trade spat and concerns about the U.K. leaving the European Union, which contributed to a 2.7% decline in revenue for the unit. Still, efficiency gains helped adjusted operating profit to increase 1.7%.

UPS is in a position to capture the increased demand for next-day delivery that’s being driven by e-commerce, Abney said on a conference call with analysts. The company is adding 11 new aircraft this year and another 11 in 2020. He expressed confidence that UPS had turned around its recent trend of shrinking margins by adjusting its operations to cope with an influx of residential deliveries spurred by online shopping.

“We’re becoming, as a company, more agile, and the timing of our investments could not have been any better,” Abney said. “The structural change in the market for next-day delivery is favorable for UPS.”

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Susan Warren, Tony Robinson

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