UPS Analysis

In the previous article we looked at Fedex Corporation, a company that has specialized in overnight delivery. We have two other companies in the same business - UPS and DHL. UPS is a public company that has specialized in delivering large and small packages around the world. DHL is a privately held company that specializes in international delivery of couriers.

The package delivery and handling business is interesting for several reasons. The growing trend of globalization and commerce needs more shipping and delivery across the world. Another factor aiding this industry in the growing wealth around the world. A third factor in favor of this business is the increasing demographic trends and e-commerce in the US needing the services of these companies.

Currently this sector is looking a bit attractive. The attractiveness is primarily because of the expected economic downturn and people expecting slow down in growth in this segment. The recent price increases by UPS and Fedex show that the companies have pricing power and the market is fairly robust. In the rest of the article, we will analyze UPS and consider its pros/cons.

UPS's competitive strength is the built up infrastructure in North America and Europe. UPS is currently building up its network in China as well. A con of UPS is that the labor force is unionized and the record of companies with unions is dismal.

Now that we are convinced that UPS has potential as a business, let us look into the financials. We will also look into the TA ( technical analysis ) to verify the trend for UPS.

Since we dont have the trends for the full ten years ( a preferred period ), we will only look at the trends for the last six years for which public data is available. UPS stock price hasnt increased significantly since its IPO but we have seen compression of its P/E ratio. The revenues have increased at the rate of 8.7% per year for the past six years. The EPS has grown at the rate of 29% in the same period though the 1999 numbers were comparitively a bit lower. The number of shares has remained steady - so the buy backs have stemmed further dilution in shares. The free cash flow has seen steady and impressive growth in this period.

The return on equity has averaged about 20% in the last five years for UPS. Approximately 40% of the income is paid out in dividends. If the current ROE holds, the EPS should be about $8 in about ten years. This would result in a divident yield of 3.25 dollars/share up from the current value of $1.55/share. If the P/E of 20 holds, the stock should be worth about $160 in that time frame. In that time, $15 would have been paid out in dividends. This would make the total return about $175 dollars at a cumulative rate of about 9%. If the stock goes further, it is a good time to accumulate UPS.