Shares of United Parcel Service Inc. soared to a record close Tuesday, after the package delivery giant reported third-quarter profit and revenue that rose above expectations, as a 12% rise in revenue per piece helped drive the U.S. Domestic business to top forecasts.
And at a time when other transportation companies are battling supply-chain challenges, inflation and labor shortages, a continued focus on boosting productivity helped keep expense growth below revenue growth.
Chief Financial Officer Brian Newman told MarketWatch that the investments UPS has made into improving productivity are paying off, as although volume slipped 3.4% during the quarter, direct labor hours declined even more at 5%.
“We’re not just avoiding costs, we’re taking costs down,” Newman said.
The stock /zigman2/quotes/201245396/composite UPS +2.96% ran up 7.0% to close at $218.07, above the previous record close of $217.50 set on May 7. The stock has gained for six straight sessions, and for the 10th time in the past 11 sessions.
Net income rose to $2.33 billion, or $2.65 a share, from $1.96 billion, or $2.24 a share, in the year-ago period. Excluding nonrecurring items, such as transformation and other charges of $54 million, adjusted earnings per share increased to $2.71 from $2.28 and beat the FactSet consensus of $2.55.
Total revenue grew 9.2% to $23.18 billion, above the FactSet consensus of $22.57 billion, while total operating expenses increased 7.5% to $20.29 billion.
“We’re firing on all cylinders right now,” Newman said.
Recently, a key component of expenses in the delivery business is wages, as companies need to pay more to attract a dwindling supply of drivers. Rival FedEx Corp . /zigman2/quotes/203047719/composite FDX +3.30% recorded a 13% bump in compensation and benefits in its third quarter, and trucker J.B. Hunt Transport Services Inc . /zigman2/quotes/205536609/composite JBHT +2.23% posted a 23% increase in wages and benefits.
CFO Newman said that while UPS isn’t immune to the recent jump in labor costs, roughly half of the driver workforce is full-time and unionized, and the contractual wage commitments aren’t up for change until 2023. So although driver pay is a “big number” for UPS, Newman said its predictable. “I can plan for it,” he said.
And in an effort to cushion the company from cost inflation pressures, Chief Executive Carol Tomé said on the post-earnings conference call with analysts the company will implement a general rate increase of 5.9% for 2022.
“At the end of the day, we need to be paid for the services we provide,” CFO Newman said.
Within UPS business segments, U.S. Domestic revenue rose 7.4% to $14.21 billion, topping the FactSet consensus of $14.19 billion, helped by a 12.0% increase in revenue per piece.
International revenue jumped 15.5% to $4.72 billion, beating expectations of $4.66 billion, a marked improvement from 5.7% growth in the second quarter and a 2.2% decline in the first quarter.
Supply chain revenue rose 8.4% to $4.26 billion, beating analyst projections of $3.67 billion, as forwarding and logistics combined grew 35.4%.
UPS’s health care business, which includes not just the delivery of vaccines but also cold storage and dry ice, is showing strong growth, Newman said. He projects it to be a $10 billion business by 2023. And regarding vaccine delivery, he said UPS will deliver more than 1 billion COVID-19 vaccine doses by the end of the year, with 99.9% on-time delivery.
Looking ahead, the company raised its guidance for return on invested capital (ROIC) to 29% from 28% and for capital expenditures to $4.2 billion from $4.0 billion.
Newman said that with ROIC now rising toward 30%, after years of declining, there’s an incentive to “invest a bit more” back into the business. He believes the biggest differentiator has been UPS’s “better not bigger” strategy, which drove a shift in focus to value from volume.
Analyst Helane Becker at Cowen said in a research note following the results, that she expects UPS to raise its quarterly dividend by 35% to 40% in the March quarter. UPS’s stock already provided a relatively high dividend yield of 1.86% at current prices, which compares with rival FedEx’s yield of 1.25% and the implied yield for the S&P 500 SPX of 1.32%.
He said the improved productivity, increased commitment to small- and medium-size businesses, focus on profits and customer-first mentality sets the company up nicely for the holiday season.
“Heading into peak season, UPS is ready, and determined to be the industry leader,” Newman said.’
UPS stock has rallied 29.5% year to date, while FedEx shares have dropped 8.4%. In comparison, the Dow Jones Transportation Average /zigman2/quotes/210598063/realtime DJT +2.94% has advanced 27.4% this year and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.82% has gained 16.8%.