UPS (UPS) reported decent second-quarter results, with revenue expanding 8.1% and adjusted earnings per share advancing 25% from the prior-year period. The firm’s adjusted operating margin increased 110 basis points from the same quarter a year ago to 12.6%, which fueled consolidated operating profit growth of over 20% in the period. We think UPS’ shares are slightly overvalued and think there are better places for investors’ money at this time.
UPS mentioned that domestic package volume growth was relatively flat in the quarter due to the slow economy, but operating profit in the segment jumped nearly 30%. International package revenue was strong, showing over 13% growth thanks to an 8% increase in export volumes and pricing expansion. UPS’ supply chain and freight segment showed the greatest percentage increase in operating profit (up over 40%) thanks to improvements in its forwarding business and favorable buy rates.
Although we liked UPS’ second-quarter performance, we were somewhat surprised by its language regarding softening economic conditions. On the call, UPS seemed focused on high unemployment rates, weak consumer confidence, the end of quantitative easing and the government debt issues – perhaps prepping the investment community for a disappointment in the current quarter. In fact, the company noted that it expects third-quarter volume growth to be slow and operating margins to be roughly flat. Management also guided the street to second-half operating profit growth in the “mid-to-upper teens,” lower than the 20%+ expansion in its second quarter. Despite its concerns regarding slower growth, management reiterated 2011 adjusted diluted earnings per share guidance in the range of $4.15 to $4.40. Nonetheless, we’d steer clear of UPS’ shares for now, as we think there are better opportunities out there.