United Parcel Service, Inc.’s (NYSE:UPS) stock was strong despite it releasing a soft earnings report last week. However, we think the company is showing some signs that things are more promising than they seem.
How Do Unusual Items Influence Profit?
To properly understand United Parcel Service’s profit results, we need to consider the US$837m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that’s hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don’t come up again, we’d therefore expect United Parcel Service to produce a higher profit next year, all else being equal.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On United Parcel Service’s Profit Performance
Because unusual items detracted from United Parcel Service’s earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that United Parcel Service’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company’s potential, but there is plenty more to consider. So while earnings quality is important, it’s equally important to consider the risks facing United Parcel Service at this point in time. For instance, we’ve identified 2 warning signs for United Parcel Service (1 is concerning) you should be familiar with.
Today we’ve zoomed in on a single data point to better understand the nature of United Parcel Service’s profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.