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United Parcel Service, Inc. (UPS - Analyst Report) reported fourth quarter 2012 adjusted earnings per share of $1.32, missing the Zacks Consensus Estimate of $1.38. However, earnings per share registered growth of 3.1% from $1.28 in the year-ago quarter.

Adjusted earnings for the quarter exclude the impacts of a non-cash $3 billion after tax charge for pension and retirement benefits, arising from decline in discount rates. Adjusted earnings for the year grew 4.1% year over year to $4.53 per share. 

Total revenue for the quarter inched up 2.9% year over year to $14,571 million but fell short of the Zacks Consensus Estimate of $14,387 million. The year over year growth was driven by improvement in freight pricing in both, ground and air products. In the reported quarter, consolidated volume and average revenue per piece respectively grew 2.9% and 1.4% year over year.

For the year 2012, total revenue increased 1.9% year over year to $54,127 million. Volume and increased 3.2% year over year and average revenue per piece remained flat year over year.

Total operating profit increased 1.2% year over year to $2,049 million. Operating margin fell 20 basis points (bps) year over year to 14.1%. For 2012, total adjusted operating profit rose 2.9% year over year to $7,070 million, resulting in an operating margin of 13.1%, up 20 bps year over year.

Revenue Segments

US Domestic Package revenue rose 3.0% year over year to $8,933 million in the reported quarter. Operating profit grew 4.4% year over year to $1,378 million. Operating margin grew 20 bps year over year to 15.4%.

The margin expansion was driven by solid volume growth and improved network efficiencies and higher base rates. Average daily volume increased 3% on growth in online shopping. Revenue per piece improved 1.7% year over year driven by higher rates.

International Package revenue rose 1.5% year over year to $3,201 million. Operating profit fell 1.2% year over year to $499 million in the reported quarter and operating margin contracted 40 bps to 15.6%. Average daily volume grew 2.2% year over year on strong international shipments in Europe and Asia. Revenue per piece grew 0.9% year over year.
    
Supply Chain and Freight segment revenue rose 4% to $2,437 million. Operating profit plunged 13.6% year over year to $172 million. Operating margin contracted 140 bps year over year to 7.1%.

Liquidity    

UPS generated free cash flow of $5.4 billion and spent $2.2 billion in 2012. The company repurchased 21.8 million shares worth $1.6 billion at year-end 2012.

Guidance

For 2013, UPS expects earnings per share in the band of $4.80–$5.06, representing growth of 6–12% over 2012 adjusted earnings. The company raised its share repurchase guidance for 2013 from $1.5 billion to $4.0 billion.
Other Stocks
 
Besides UPS, another stock worth a look is Air Transport Services Group, Inc. (ATSG - Snapshot Report), which carriers a Zacks Rank #2 (Buy).

Our Analysis

Despite the challenging economic conditions, we remain encouraged by UPS' continued productivity gains, improved operating profit, and strong free cash flow position. Despite the failure of its mega Dutch acquisition, TNT Express N.V. (TNTEY), the company remains focused on smaller acquisitions to expand its footprint globally. 

However, we remain concerned over the volatile economy condition that continues to restrict market demand. Further, the company is also exposed to unionized workforce and intense competition from giants like FedEx Corporation (FDX - Analyst Report).

UPS retains a Zacks Rank #3 (Hold).

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