(Bloomberg)—United Parcel Service Inc. is beginning to reap benefits from a three-year plan to increase spending on new aircraft, automation and package-sorting to cope with surging ecommerce demands.
Profit margins held at more than 10% in the quarter even with capital spending that jumped to $6.6 billion in 2018, more than double the average annual amount over the previous five years—evidence the company was able to keep costs in check while handling the peak season’s higher volume.
Shares rose 4.1 % to $105.37 at 9:35 a.m. in New York. That’s a turnabout from last year when UPS announced the stepped-up investment on Feb. 1 and investors reacted by pushing the stock down 17% over the next month. The company still has a long way to go to regain the ground lost from its $134.09 peak last January.
“UPS posted its strongest peak-shipping season since at least 2013 last year, and these trends should continue as new global sorting hubs come online,” Helane Becker, an analyst with Cowen, said in a note on Thursday.
Efficiency solution
Amid a softening of the international economy, UPS posted adjusted fourth-quarter earnings of $1.94 a share, beating Wall Streets’ estimates of $1.90.
Parcel carriers are under pressure as the surge in ecommerce has increased residential deliveries; they are more costly than commercial service, where each address is likely to receive more packages. CEO David Abney is responding by boosting efficiency and focusing on small businesses to keep profits from eroding.
The improvements come as the company warned of a slowdown in international markets amid a trade war with China and uncertainty over Britain’s looming exit from the European Union. Also, labor costs are likely to rise in 2019 after the company reached a new five-year agreement with its union workers last year, Becker said.
UPS said it expects to earn $7.45 to $7.75 a share this year. The midpoint of $7.60 compared with the $7.69 expected by analysts. Those results include a 51-cent hit from tax and pension changes, Chief Financial Officer Richard Peretz said on a call with analysts. Capital spending will amount to as much as 10 percent of revenue.
“The outlook likely factors in the new labor contract along with continued uncertainty regarding U.S., China trade relations and Brexit,” Becker said.
Buffering effect
UPS provided some reassurance to investors who were worried after main rival FedEx Corp. warned in December that slowing international markets would be a drag on profit. UPS said its international sales rose 5.4% in the quarter after adjusting for currency fluctuations.
“Our broad portfolio, diverse revenue base and flexible network help buffer the impacts of global economic softening,” Abney said in a statement. “These strengths also position UPS to help customers navigate the current complexities of global trade.”
Revenue in the fourth quarter rose 4.6% to $19.8 billion, helped by higher pricing and more business deliveries. The company’s U.S. operations shipped 21 million packages per day.