Is UPS’s Domestic Package Segment Riding on ‘Ground’ Growth?
United Parcel Service Beat 1Q16 Estimates: Why Is the Stock Flat?
UPS’s Domestic Package segment in 1Q16
In Part 2 of this series, we saw a snapshot of United Parcel Service’s (UPS) overall revenues. Now we’ll look at UPS’s U.S. Domestic Package segment. This segment consists of UPS Next Day Air, UPS Deferred, and UPS Ground services. The segment’s revenue increased 3.1% in 1Q16 on a year-over-year basis. The segmental revenue increased to $9.0 billion from $8.8 billion in 1Q15.
UPS Ground accounts for the maximum share of the segment’s revenues. Its share in segmental revenues increased to 73% from 72% in 1Q15. In addition, Ground services revenues increased by 3.7% on a year-over-year basis, the highest of all three subsegments.
Revenue per package declines
In 1Q16, UPS saw its average revenue per package decline by 1.3% for the U.S. Domestic Package segment. The base price hike of about 2% was impacted by changes in package characteristics and the mix of products and customers. In addition, the revenue per package declined due to 120 basis points lower fuel surcharges.
U.S. Domestic Package segment volumes
Growth in e-commerce has been a key catalyst recently for UPS’s growth. For 1Q16, the U.S. Domestic Package segment’s average daily volumes increased by 2.8%, led by demand in e-commerce. From 14.7 million average daily pieces in 1Q15, it grew to 15.1 million pieces in 1Q16. However, after five continuous quarters of double-digit growth, the volume growth in deferred products declined by nearly 2%.
Management insight
Management expects average daily volumes to increase by 2%–4% in 2016, leading to a revenue growth of 4%–6%. In the long term until 2019, UPS management targets a revenue growth of 5%–6%.
UPS is part of the SPDR S&P Transportation ETF (XTN). XTN holds 2.6% in UPS. UPS’s major competitor, FedEx (FDX), makes up 2.8% of XTN. The other prominent transportation and logistics stocks included in the ETF are J.B. Hunt Transport Services (JBHT) and Expeditors International of Washington (EXPD).
In the next article, we’ll take a look at UPS’s International Package segment and management’s outlook for the segment.
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