United Parcel Service (NYSE: UPS) came in with wobbly second-quarter earnings earlier this week. It is a mystery to this investor why the stock just keeps going up. As you’ll see, the numbers aren’t that great and the stock is wildly overvalued.UPS-earnings

Domestic revenue eked out a 2% rise to $8.79 billion, which is pretty lousy. When we drill down into that figure, we do find some good news, which has to do with the company’s relatively new USPS-integrated products. The 2% increase was the result of an 8% increase in the SurePost product, on top of a terrific 15% jump in deferred air freight product.

What is SurePost?  Basically, it allows people to ship using all the logistical support of UPS Ground. Rather than have each UPS truck deliver each package individually for a given zone, the company instead delivers them to the local U.S. Post Office branch for the last leg of delivery. Thus, UPS saves on labor and fuel as well as vehicle usage. The cost savings are passed on to consumers. If the package is not terribly urgent, then it saves people money.

The deferred air freight product is the same concept, but for things that need to travel by air.

There’s bad news elsewhere, though.  We see that fuel surcharges are being lowered or removed since the price of gasoline has been falling.  Thus, domestic revenue per package saw 0% growth. That’s depressing because it means UPS has virtually no growth in this segment, and any it had was goosed by the surcharges.

Business in Europe looked better. Intra-European UPS shipments grew 8.49%. The bad news? The strong dollar offsets the good news.

Sad Financials

When we turn back to the UPS earnings report, we see just how sad the picture is for all of UPS. Domestic revenue was up 1.59%. International revenue declined badly, down 6.39%, while  Supply Chain and Freight revenue fell 4.49%. Add it all up and we find a disappointing 1.2% revenue growth rate.

If you were foolish enough to only look at operating profit and earnings per share, you’d be tricked. Operating expenses were trimmed by 9.9%. That amounts to a  $1.4 billion decline. But if you only looked at operating profit, you’d see a $1. 2 billion jump, and think all was well … except that’s entirely due to the expenses cuts.

Earnings per share exploded from $0.49 to $1.35 for 170% growth, right? Well, no. The $776 million jump in net income is the bottom line result of the cost cuts.

But there is one piece of truly great news, in that UPS continues to generate truly strong free cash flow, to the tune of $3.3 billion year to date.

Too Expensive

UPS is a sell. It’s not growing. The stock trades at 21 times the $5.20 in EPS expected for the year. I love the company , but it is far, far too expensive if it isn’t growing.

By the way, the UPS picture does not bode well for the overall economy. When things are booming, companies like UPS are shipping stuff – LOTS of stuff.  There is no growth here in the U.S., which means orders stink. That explains why UPS is telling the Fed NOT to raise interest rates, which would tamp down economic growth.

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Published by Wyatt Investment Research at