UPS rides e-commerce boom, price increases to profit surge

United Parcel Service Inc.’s profit jumped in the fourth quarter as a rush of online holiday shopping boosted package volume and enabled the courier to raise its prices.

Adjusted earnings climbed to $2.66 a share, the company said in a statement Tuesday. That topped the $2.15 average of analyst estimates compiled by Bloomberg. While UPS didn’t venture a profit forecast because of uncertainty from the coronavirus pandemic, it plans to pare investment and repay debt as Chief Executive Officer Carol Tome furthers her “better not bigger” strategy.

“We believe these results will go a long way to re-energizing investors about the potential for meaningful profit improvement at UPS over the next several years under the leadership of its new CEO,” Jack Atkins, an analyst with Stephens, said in a note to clients.

The performance positions UPS for another strong year in 2021 as consumers continue to avoid stores in favor of e-commerce shipments to their homes, spurring demand for the courier’s ground deliveries. The company’s air-freight operation is poised for growth as it ramps up global distribution of Covid-19 vaccines.

The shares rose 3.8% to $162.27 at 9:39 a.m. in New York. UPS surged 51% in the 12 months through Monday, easily outpacing the 16% gain of the S&P 500 Transportation Index.

Smooth Peak

The Atlanta-based courier had one of its smoothest peak seasons last year despite soaring volume. UPS flexed its pricing power by adding fees on its largest retail customers while sometimes throttling back service for customers whose volume exceeded agreed-upon levels. That helped UPS increase revenue per ground package by 7.8% as it handled more residential deliveries, which are typically less profitable than commercial shipments.

In the domestic division, which makes up about two-thirds of sales, UPS had warned of fourth-quarter headwinds such as increased spending to speed up the network and more hiring for peak season. While adjusted profit margins in the operation softened slightly to 8.8%, that was enough to beat Citigroup Inc.’s estimate of 7.2%.

“Collectively, we believe these results are a strong launching point for profit growth in 2021,” Citigroup analyst Christian Wetherbee said.

The air-freight operation also increased prices and kept planes full amid last year’s dearth of commercial flights, which often carry cargo as well as passengers. That pushed the unit’s operating margin to more than 24%, which helped lift UPS’s overall adjusted operating profit margin to 11.5%—the highest since the third quarter of 2019.

Total sales jumped 21% to $24.9 billion in the fourth quarter, while analysts expected $22.9 billion.

Paring Investment

Tome last week made her first big move to slim down UPS and focus on its core package business, reaching an agreement to sell the company’s freight unit.

She extended that theme with the earnings release, saying UPS will cut capital expenditures to $4 billion this year from $5.4 billion in 2020. The company spent more than $6 billion a year in 2018 and 2019 to increase automation and capacity.

The new CEO, who took the reins in June, also said the company won’t buy back shares this year and instead will pay down $2.5 billion of long-term debt when it comes due.