UPS Beats Q3 Estimates; Shares Plunge 9% On Margin Concerns

Shares of United Parcel Service fell 8.8% on Wednesday though the logistics company beat the Streets’ expectations for the third quarter on strong pandemic-induced demand for e-commerce deliveries.

United Parcel’s (UPS) revenue surged 15.9% Y/Y to $21.24 billion and beat analysts’ estimate of $20.19 billion. The company attributed the strong top-line growth to continued outbound demand from Asia and growth from small and medium-sized businesses. It experienced a 13.8% rise in average daily volume due to continued elevated residential demand in the domestic market as people are increasingly making online purchases amid the pandemic.

The company’s adjusted EPS grew 10.1% to $2.28 driven by increased revenue partially offset by pressure on the company’s margins. UPS’ earnings came ahead of analysts’ EPS forecast of $1.90. The adjusted operating margin fell to 11.3% in 3Q20 from 12% in 3Q19 as expenses to support higher volumes weighed on profitability.

Notably, the adjusted operating margin of the Domestic Package segment shrunk 220 basis points Y/Y to 8.6% due to a spike in residential deliveries while the International Package segment’s adjusted operating margin expanded 400 basis points to 23.8%.

On the conference call, the company stated that its commercial business continued to be under pressure in 3Q due to the economic downturn. However, UPS optimized its network and captured share in small and medium-sized businesses.

Also, UPS believes that penetration of e-commerce retail sales will not decline even after the pandemic. The company highlighted that e-commerce sales are now projected to account for over 20% of all US retail sales this year. UPS did not provide any guidance for 4Q or full-year citing “uncertainty around the timing and pace of the economic recovery.” (See UPS stock analysis on TipRanks)

Cowen analyst Helane Becker reiterated her Hold rating for UPS following the results, as she acknowledged in a research note to investors that the company continues to have trouble “bending the cost curve” in its US business.

Meanwhile, the Street is cautiously optimistic about UPS with 11 Buys, 3 Holds and 4 Sells adding up to a Moderate Buy consensus. With shares already advancing 33.3% year-to-date, the average analyst price target of $164.87 suggests an upside potential of about 6% in the coming months.

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