Global package delivery giant United Parcel (NYSE: UPS) announced fiscal 2019 fourth quarter results that MET expectations.

Revenue came in at $20.57 billion, a tad below the consensus estimate of $20.66 billion. The performance marked a 4% increase over the same period a year ago when revenues were $19.85 billion. The company saw strong volume growth during the peak holiday season.

Adjusted earnings per share of $2.11 matched the consensus estimate and increased 9% over last year. The company reported adjusted EPS of $1.94 in the same quarter of last year.

The results were driven by a 9% increase in U.S. daily shipment volume and a nearly 26% jump in Next Day Air volume. Overall volumes increased 7.5% to more than 26.6 million packages largely due to a surge in demand for air services from domestic customers.


U.S. revenue increased approximately 6.5% while International revenue slipped almost 2% year-over-year. The decline in International sales was due to lower volumes in Asia and the UK. Revenue at the company’s third segment, Supply Chain and Freight, was relatively flat.

 

UPS TURNS TO SMALL BUSINESSES FOR PROFIT GROWTH

Recent performance at UPS has been driven by solid growth in the e-commerce business. This trend continued in the fourth quarter and is likely to persist throughout 2020.

The company forecasted global e-commerce volume growth of 28% from 2019 to 2021. Growth in business-to-business e-commerce is expected to be especially strong. The B2B e-commerce market is expected to reach $1.8 trillion by 2023 according to research firm Forrester.

UPS provided its full-year outlook for EPS of $7.76 to $8.06. It has made the small-to-medium-sized business (SMB) segment a major priority for the upcoming year. By increasing its delivery speed and expanding weekend services the logistics leader hopes to discover meaningful profit growth in the upcoming quarters.

The air freight and cargo transportation industry has produced earnings growth of around 13% over the last five years while UPS has underperformed with 9% growth.

 

AMAZON UNCERTAINTY WEIGHS ON FUTURE RESULTS

UPS has been challenged by Amazon’s move to increasingly rely on its own logistics operations Amazon Logistics. This poses a threat to both UPS and FedEx. For now, however, Amazon remains UPS’ biggest customer and was the leading contributor to volume growth in the latest quarter.

The progression of the company’s relationship with Amazon will also go a long way in dictating performance for this year and beyond.

Nevertheless, UPS recognizes Amazon’s direction and has decided to seek growth from the SMB business to help offset any potential drag from a potential loss of Amazon volume.

Meanwhile, much of the weakness in the company’s 2019 performance can be attributed to the slowdown in global manufacturing. Lower levels of industrial production in both the U.S. and overseas negatively impacted otherwise healthy shipment volumes.

An improvement in the manufacturing sector would aide results in 2020. The progression of the company’s relationship with Amazon will also go a long way in dictating performance for this year and beyond.

The focus on the SMB market is a positive development. Given the size of this rapidly evolving market and UPS’ clout in logistics, it should be able to successfully leverage this opportunity to drive profit growth and offset any Amazon-related weakness.

After rising 24% in 2019, UPS stock is down 1% this year while the industry is down 2%. This compares to a flat year-to-date return in the S&P 500 index.

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