UPS 2Q – comments

Attached below as a word file and also pasted in please find our initial
>thoughts on UPS quarter just reported as well as a grid comparing volume
>and
>yield growth by product vs. last quarter and our expectations for the
>quarter.
>
>***Please see important disclosure material at the bottom of this email and
>at the end of the attached note.
>
>United Parcel Service (UPS) – $64.79 – Outperform
>
>* UPS reports modest upside 2Q. This morning before the market
>opened, UPS reported continuing 2Q:03 EPS of $0.60, compared to our
>estimate
>of $0.59, consensus of $0.59, and $0.54 a year ago (13% y-o-y growth). On
>a
>reported basis, UPS reported $0.61 (including a net $0.01 gain from the
>sale
>of Mail Technologies within the Non-Package segment). The company’s
>conference call will be held at 10 am EDT, dial-in number (973) 582-2745.
>
>* Strength in the quarter again came from International (operating
>income up more than 155% y-o-y compared to our 116% forecast). While not
>quantified in the release, we believe currency, fuel, and charter flying
>all
>positively impacted the quarter. Domestic parcel volumes grew 1.2% y-o-y
>(vs. our 1.5% forecast), while the Domestic Package OR deteriorated 160bp
>to
>86.4% – 10bp worse than our projection.
>
>* 3Q guidance inline with Consensus. In its release, management
>provided initial 3Q:03 guidance of $0.58 to $0.62, compared to our estimate
>of $0.64 and Consensus of $0.60 prior to the release.
>
>* Revenue and continuing operating income higher than expected.
>Revenue grew 7.1% y-o-y, 30bp better than our 6.8% forecast. After adding
>back a $24 million operating loss from the sale of Mail Technologies,
>continuing operating income improved 7.4% y-o-y vs. our forecast of 4.4%
>growth.
>
>* Volume, yield, and operating ratio tables. Domestic Express volumes
>were strong in the quarter but yields for the product were weaker than
>expected, while the reverse was true for domestic Ground. (See Exhibit 1
>below, which highlights UPS’s actual vs. projected volumes and yield
>growth.)
>
>Exhibit 1. UPS Volume, Yield, and Operating Ratio Trends
>Y-O-Y Volume Trends Y-O-Y Yield Trends
>2Q:03A 2Q:03E 1Q:03 2Q:03A 2Q:03E 1Q:03
> Next Day Air 9.1% 5.0% 3.9% -4.8% -1.0% -0.9%
> Deferred 2.1% -3.0% -4.0% 0.9% 3.0% 3.8%
>Total U.S. Air Express 6.0% 1.5% 0.4% -2.3% 1.1% 1.4%
> Ground 0.3% 1.5% -1.5% 3.4% 2.5% 3.6%
>Total U.S. Daily Package 1.2% 1.5% -1.2% 2.4% 2.0% 3.2%
>
>International Package:
> Domestic -1.7% 1.0% -0.5% 21.7% 15.0% 20.4%
> Export 6.2% 9.0% 10.3% 16.3% 9.5% 15.6%
>Total Daily International 1.2% 3.9% 3.3% 21.2% 14.2%
>21.7%
>Total Daily Package 1.2% 1.7% -0.8% 5.2% 4.0% 6.1%
>
>Operating Ratio 2Q:03 2Q:03E 1Q:03
>US Domestic Package 86.4% 86.3% 88.3%
>International 88.5% 90.0% 89.7%
>Non Package 84.4% 86.5% 84.6%
>Total Operating Ratio 86.9% 86.9% 88.2%
>Source: Bear Stearns & Co., Inc. estimates; company reports.
>
>
> <>
>
>Best,
>
>Ed Wolfe>