Shares of global package delivery company United Parcel Service (NYSE: UPS – $109.66) are shedding about 6% in today’s trading after reporting lower-than-expected fourth quarter results and reduced its outlook for the year. Adjusted revenue grew 5.5% to $16.93 billion, but short of Street expectations of $17.0 billion. The domestic unit’s sales were up 6.3%, thanks largely to a 5% increase in the number of average daily shipments. After forecasting record holiday season deliveries, UPS delivered 1.4 billion packages during the quarter, up 7.1% from the prior year. Shipments from the International division rose a healthy 8.4%, owing predominately to the Asian and Europe regions. Excluding items, earnings rose to $1.63 a share from $1.57 a year ago, but six cents below the consensus of $1.69.
Heightened e-commerce activity during the holiday season resulted in an increase in residential deliveries, which are less profitable. The company is trying to offset the added costs of those deliveries with new routing systems that optimize routes and bundling orders to be delivered on certain days. It is also raising prices so that it can recoup the higher delivery costs as well as the additional investments to handle the increased volume. Last year, UPS spent nearly $3 billion on capital expenditures, including adding 7 million square feet of new capacity. Management also pointed to softness in industrial production as another fourth-quarter obstacle, but was offset by cost savings from increased automation.
UPS provided earnings guidance for 2017 of $5.80 to $6.10 compared to 2016’s $5.77 per share. However, valuations had priced in full-year earnings per share closer to $6.16. Despite the recent pull back, the shares are up over 25% over the past 52-weeks. UPS continues to operate at a high level, and I still find the shares attractive from on a risk-adjusted basis. The company has strong finances and positions in UPS also provided investors with a growing and well covered dividend, yielding 2.7%.