Does This Shipping Titan Warrant a Buy?
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shipping companies are generally regarded as bellwethers for the global economy, as they represent a crucial link in business to business and business to consumer trade. A little while ago I wrote an article on FedExs’ (NYSE: FDX) disappointing earnings and outlook, warning this may be a decidedly bad sign for global trade. However, UPS’ (NYSE: UPS) latest reports paint a somewhat different picture of global trade flows, amidst the turmoil that is rocking international financial markets. UPS' earnings came in rather strong, and although analyst expectations were low this quarter, this may be a small glimmer of hope in uncertain times.
Earnings and Guidance
United Parcel Service, or UPS, is the world’s number one package shipping company with a market cap of over $70 billion dollars. Active in more than 220 countries worldwide, the corporation serves about 1.1 million shipping customers every business day. In 2011 they delivered just over 4 billion packages. On Tuesday, the company reported a 2012 third quarter EPS of $1.06, which met analyst expectations. The International segment delivered its best third quarter results ever, with operating profit up 7.7% over the prior year period.
Perhaps more importantly, UPS updated its full-year guidance with increased confidence in Q4 results. The company is now looking at full-year EPS between $4.55 and $4.65. Compare this to FedEx’ Q2 report, in which 2012 full-year guidance as well as the outlook for 2013 was adjusted to the downside. Both companies suffer from similar risks, which include slowing global growth and sensitivity to Forex translation.
Corporate Strategy
UPS ,as well as FedEx, have been able to capitalize on the rise of internet shopping, with growing demand in China especially. According to Scott Davis, UPS' CEO, these strong results achieved in a tough global market reflect the flexibility of UPS’ business model as well as the strength granted by the breadth of the company’s product portfolio. The company has a strong cash position, ending the period with about 9 billion dollars in cash and marketable securities. This cash will be used, among other things, to finance the acquisition of TNT Express, a Dutch shipping company. This takeover should strengthen UPS’ position in Europe, a region which has proven problematic in terms of sales due to the ongoing sovereign debt crisis.
Valuations and Metrics
In terms of valuation, the stock seems more or less fairly valued to me at the moment. The stock trades at 21.4x earnings and at about 8.8 to book, both of which are at a bit of a premium to the industry average. On the other hand, UPS offers a nice 3.1% dividend. The stock has a stellar return on equity of 50.15 and a decent operating margin of 11.5%. With a beta of .85, the stock is a little less volatile than the overall market. UPS’ main competitor FedEx looks a little cheaper at the moment, with a P/E of 14.4x and a rather low price to book of 1.69. Also, FedExs’ last report surprised to the upside. These valuations suggest a cautious approach towards UPS' stock.
Bottom Line
In summary, I think’s it’s a hard call whether or not UPS warrants a buy rating at the moment. While earnings and outlook are quite good, with record results for the International segment and growing demand in Asia, the company seems valued at a slight premium to the industry at the moment. Thus, cautious investors would be advised to wait a little and see how the company performs over the Christmas period.
DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
