Will UPS Deliver Gains in 2013?

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Package delivery in the United States is essentially a duopoly.  The business is dominated by two companies.  The bigger of the two, by market value, is United Parcel Service (NYSE: UPS).  Smaller rival FedEx (NYSE: FDX) carries a market capitalization of roughly half of UPS.  Both stocks are trading near their 52-week highs.  Should investors take profits amid the uncertain economic landscape?  Or, on the other hand, is there still value left in these stocks?

Recent Performance in Review

UPS reported fourth-quarter earnings on January 31, and the results were mixed.  Revenues beat expectations, rising 3% year over year.  At the same time, UPS unexpectedly reported a loss due to one-time pension liabilities.  Stripping out the charge, the company would have earned $1.32 per share, below analyst expectations of $1.38 per share.  Investors reacted negatively to the announcement, sending shares lower on the day.

FedEx, meanwhile, reported first-half results in November of last year.  The company reported revenues rose 3.7% over the first six months year over year.  Operating income dropped, however, because of higher expenses.

Netherlands-based TNT Express (NASDAQOTH: TNTEY) is an international package deliverer.  Interestingly, UPS tried to acquire TNT but failed after European Union regulators blocked the deal.  UPS announced it would not complete the $7 billion acquisition, which would have enabled UPS to double its business in Europe.

As a result, UPS finds itself with extra cash at its disposal that would have been used to fund the TNT acquisition.  The company now plans on returning a good deal of that cash to shareholders.  In its earnings release, UPS announced it increased its plan for spending on buying back its own stock this year to $4 billion from $1.5 billion.

Where Does UPS Go From Here?

UPS predicted that this year would be yet another year of slow economic growth.  The company expects economic growth in 2013 to be 2 percent for the U.S. and 2.5 percent worldwide.  However, that’s not stopping the company from providing lofty expectations for its own operating performance.  UPS expects 2013 adjusted earnings of between $4.80 and $5.06 per share. That would be an increase of 6 percent to 12 percent over 2012.  Taking that range into consideration, at recent prices the stock trades for between 15 and 17 times 2013’s earnings.

FedEx, meanwhile, trades for a trailing price-to-earnings ratio of 16 and a forward P/E of 13.  Unfortunately for income investors, the company doesn’t offer a compelling yield at recent prices.  The stock is off to a roaring start in 2013, and the rally has therefore taken the yield down to a paltry level.  Despite solid dividend growth of 7% compounded annually over the last five years, FedEx yields less than 1%.

The Bottom Line

UPS has more to offer dividend-focused investors.  The stock yields almost 3%, and the company will most likely provide investors a dividend increase in time for its next quarterly payout.  Although UPS is a very profitable business with a wide economic moat—meaning, the package delivery industry has high barriers to entry—the shares appear fairly valued at current prices.  I’ll be placing UPS on my watch list in case a sell-off presents a better buying opportunity.

 


Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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