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Will High Costs Mar United Parcel's (UPS) Q2 Earnings?

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United Parcel Service (UPS - Free Report) is scheduled to report second-quarter 2017 results on Jul 27, before the market opens.

In the last quarter, the company delivered a positive earnings surprise of 1.54%. It reported earnings of $1.32, beating the Zacks Consensus Estimate of $1.30. Earnings increased 3.9% on a year-over-year basis. Notably, the results were aided by the substantial increase in operating profits at the Supply Chain and Freight unit.

Moreover, revenues improved 6.2% to $15,315 million from the year-ago quarter, beating the Zacks Consensus Estimate of $15,179.5 million.

Let’s see what awaits the company in the second quarter.

Factors Likely to Influence this Quarter

We expect the company’s bottom line to be hurt by escalated costs in the quarter.  As of now, high package delivery costs have been hurting United Parcel for some time, and the to-be-reported quarter is likely to be no different.

Moreover, United Parcel, like its rival FedEx Corporation (FDX - Free Report) , is leaving no stone unturned to expand its presence. Though positive on such efforts, we believe that expansion related expenses might also drag down second-quarter earnings.

Foreign currency-related headwinds are expected to hurt the quarter’s results too. Additionally, unfavorable product mix and weakness in industrial production might dampen the company’s performance.

In fact, the negative sentiment surrounding the stock can be gauged from the 1.4% decline in the Zacks Consensus Estimate for earnings over the last three months. However,  the company’s efforts to reward shareholders consistently through buybacks and dividend payouts are impressive.

Earnings Whispers

Our proven model does not conclusively show that United Parcel will beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: United Parcel has an Earnings ESP of -0.69% as the Most Accurate estimate is $1.45 while the Zacks Consensus Estimate is pegged at $1.46. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: United Parcel carries a Zacks Rank #4 (Sell).

As it is, we caution you against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

With United Parcel likely to disappoint, investors interested in the broader Transportation sector may consider other stocks like American Airlines Group, Inc. (AAL - Free Report) and Norfolk Southern Corporation (NSC - Free Report) , since our model shows that all these possess the right combination of elements to come up with an earnings beat in the next release.

American Airlines has an Earnings ESP of +2.19% and a Zacks Rank #1. The company is slated to release its second-quarter 2017 results on Jul 28. You can see the complete list of today’s Zacks #1 Rank stocks here.

Norfolk Southern has an Earnings ESP of +0.61% and a Zacks Rank #2. The company will report its second-quarter 2017 financial numbers on Jul 26.

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