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United Parcel Service, Inc. (UPS - Analyst Report) reported first quarter 2013 adjusted earnings per share of $1.04 surpassing the Zacks Consensus Estimate of $1.01. Earnings per share registered growth of 4% from $1.00 in the year-ago quarter mostly driven by increased e-commerce activities. Adjusted earnings for the quarter excluded the impact of an after-tax gain of $36 million on transactions related to the company’s attempt to acquire TNT Express.

Total revenue for the quarter grew 2.3% year over year to $13,434 million but fell short of the Zacks Consensus Estimate of $13,456 million. The year-over-year growth was driven by improved B2C sales along with stronger post holiday sales in Jan. In addition, UPS domestic business also reflected strong revenue growth.

Total adjusted operating profit rose 3.2% year over year to $1,619 million. Operating margin improved 20 basis points (bps) year over year to 12.1%.

Revenue Segments

US Domestic Package revenues rose 3.3% year over year to $8,271 million in the reported quarter. Operating profit grew 9.0% year over year to $1,085 million. Operating margin grew 70 bps year over year to 13.1%. The margin expansion was driven by solid volume growth, improved network efficiencies and higher base rates. Average daily volume increased 4.4% on increased online shopping. Revenue per piece improved 0.4% year over year driven by higher rates.

International Package revenues rose 0.4% year over year to $2,978 million. Operating profit fell 4.2% year over year to $391 million and operating margin contracted 70 bps to 13.1%. Average daily volume grew 1.8% year over year on strong international shipments in Europe and Asia. Revenue per piece fell 0.5% year over year.
    
Supply Chain and Freight segment revenues inched up 0.9% to $2,185 million. Operating profit plunged 13.9% year over year to $143 million. Operating margin contracted 120 bps year over year to 6.5%.

Liquidity    

UPS generated free cash flow of $1.4 billion and spent $453 million in the first quarter. The company repurchased 12.2 million shares worth $1.0 billion and paid dividends of $572 million in the reported quarter.

Guidance

For 2013, UPS continues to expect earnings per share of $4.80–$5.06, representing growth of 6–12% over 2012 adjusted earnings.

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 of TNT Express N.V., the company remains focused on smaller acquisitions to expand its footprint globally.

Over the long term, we believe the company will continue to invest in technology and network enhancements. Its integrated sales approach also promises growth given its industry-leading margins and financial strength. 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, which operates with the likes of Air Transport Services Group, Inc. (ATSG - Snapshot Report) and Atlas Air Worldwide Holdings Inc. (AAWW - Snapshot Report)  retains a Zacks Rank # 3 (Hold).

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