UNWRAPPING UPS PROFITS

UPS (UPS) reported second quarter revenues rose 13% to $20.5 billion with net income and EPS each up 5% to $1.8 billion and $2.03, respectively. These results were better than management expected, driven in part by the changes in demand that emerged from the pandemic. This included a surge in residential volume with U.S. domestic average daily volume increasing a record 23%, reaching 21.1 million packages per day. Business to consumer shipment growth was up 65% due to strong demand for residential delivery as a result of shelter in place restrictions, retail closures and stimulus checks. International average daily volume grew 10%, driven by strong outbound demand from Asia and an increase in cross-border e-commerce volume in Europe.

Free cash flow nearly tripled during the first half of the year to $3.9 billion with the company paying $1.7 billion in dividends, representing a 5% increase over the prior year period. The dividend is a hallmark of UPS financial strength with the dividend reflecting 50 years of stability and growth. UPS maintains a strong credit rating which provides financial flexibility.

Carol Tome, the new CEO, is focused on improving operating margins and return on invested capital over the longer term to help UPS “get better, not bigger” which will increase cash flow generation and shareholder returns. During the second half of 2020, UPS expects a more gradual economic recovery until the virus spread is controlled and a vaccine is widely available.

During the past three months, UPS’ stock soared over 60% with the stock now appearing fully valued. This has prompted us to unwrap some UPS profits for the first time in 15 years by trimming our position. 

HARVESTING TRACTOR SUPPLY PROFITS

Tractor Supply (TSCO) plowed up exceptional growth in the second quarter with sales jumping 35% to $3.2 billion, net income growing 54% to $339 million and EPS climbing 61% to $2.90. Comparable store sales growth increased an impressive 30.5% with strong double-digit growth across all product categories and geographic regions. The company gained new customers at the fastest rate in company history with 4.3 million new customers during the quarter.

Free cash flow more than tripled during the first half of the year to $907 million. During the first half, the company paid $81.5 million in dividends and repurchased $263 million of its common stock. Over the past three years, Tractor Supply has delivered a roaring 123% total return.

With the stock appearing fully valued, we plan to harvest some profits by trimming our position.

FRIENDLY PROFITS FROM FACEBOOK

Facebook (FB) reported second quarter revenues rose 11% to $18.9 billion with net income increasing 98% to $5.2 billion. Last year’s results included $2.2 billion in legal expenses and $1.1 billion in income tax expense. Facebook Daily Active Users increased 12% during the quarter to 1.79 billion on average with Monthly Active Users also increasing 12% to 2.7 billion. The increased engagement reflected people sheltering in place and using Facebook products to connect with the people and organizations they care about.

The company ended the quarter with a fortress financial position with more than $58 billion in cash and investments, no long-term debt and $110 billion in shareholders’ equity. Facebook’s stock is up a friendly 52% during the past two years and appears fully valued, prompting us to trim our position.

UNLOADING PROFITS AT CANADIAN NATIONAL

Canadian National Railway (CNI) reported second quarter revenue declined 19% to C$3.2 billion with net income skidding 60% to C$545 million. These results reflect the adverse impact of the pandemic as well as a one-time charge related to the sale of non-core rail lines. During the first half of the year, free cash flow nearly doubled to $1.6 billion with the company paying $817 million in dividends. Management is proud that they were able to increase the dividend 7% despite the recession.

Canadian National’s stock chugged 24% higher during the past three months and appears fully valued. We plan to unload some profits by trimming our position.