Inside Wall Street: UPS delivers global growth

The world's largest express package carrier continues to see gains in domestic and foreign shipping.

By Gene Marcial Apr 4, 2012 9:10AM

UPS (UPS) is no longer only a cyclical investment play on the U.S. economy. It has become a global, steadily growing and diversified company in multiple expanding markets.


And its stock continues to shoot higher, climbing to a 52-week high of $81.79 a share Tuesday, up from its 52-week low of $60 hit in August 2011. Many large investors are starting to recognize its worldwide impact and growth potential in good or bad times.


Some analysts now regard UPS as one of the attractive buy-and-hold stocks for long-term investors.

Over the next 12 months, several analysts and investors see the stock hitting $95, which is about 19 times their 2012 estimate and at the midpoint of UPS' five-year historical price-earnings ratio range.


As the stock market wobbled in 2008 and then plunged the following year, shares of UPS also pulled back sharply. By early 2009, the stock had crashed to as low as $38. But later that year it came out of its black hole to push higher, for the most part disregarding the ugly results of the financial meltdown and the recession that followed.


UPS is undoubtedly in a position of leadership in most of the markets it serves. At the same time, "it allows for material earnings growth as the company sheds redundant costs in the duplicate networks and provides access to new, faster growing markets," says John Barnes, an analyst at RBC Capital Markets, a bull on the stock, who rates it "outperform."


Barnes feels positive about UPS' move in March 2012 to acquire TNT Express, whose operations are focused mostly on Europe. TNT is the fourth-largest express and transportation company in the world, generating revenue of $7.2 billion in 2011. It also has sizable operations in Asia and in North and South America.


"Once the deal closes, UPS will be the largest express logistics and transportation company in the world," Barnes says. UPS will gain a significant presence in the European road freight market, an area where UPS has had very little exposure. "The most obvious benefit from this transaction will be the ability to eliminate redundant costs from the supplicate air and ground networks in all geographic regions," Barnes says.


He says the deal is expected to be accretive to UPS' earnings in the first year of the acquisition. TNT is expected to contribute a minimum of $835 million in earnings before interest, taxes, depreciation and amortization (EBITDA), or 22 cents a share.


Barnes likes the purchase of TNT, as he says it "makes sense from a strategic perspective." The recovery in international air freight volumes later this year and an improving economic backdrop in Europe will provide positive catalysts for UPS, Barnes says. The deal, he believes, will also lead to improved sentiment in Europe toward the UPS name. The analyst raised his price target for UPS to $88 a share from $84.


"Thanks to the company's stable earnings prospects and sound financial structure, UPS holds our 'highest safety' rank," says Simon E. Shnayder, an analyst at investment research firm Value Line. Moreover, its solid dividend payout of 3%, the stock offers good three-to-five-year total-return potential, he adds.


UPS should continue to do well in 2012 and 2013, Shnayder says, as it serves a key logistical role in the 2012 London Olympics. Also, a more favorable economic outlook, he says, ought to boost sales, creating better fixed-cost leverage and consequent margin expansion.


UPS has been expanding operations in such large markets as China and Israel, where the company has been increasing flight capacity and services. That augurs well for revenue, Shnayder says. "All in all, we think UPS will continue to post record results over the coming two years."

In sum, Wall Street is getting convinced that UPS, a strong generator of cash ($5 billion in in 2011 after capital expenses and pension payments), will likely see increased international and U.S. sales volumes and higher pricing power, particularly as the economy continues to improve.


"These positives support our buy opinion on the stock, despite a valuation above that of the S&P 50 on a price-to-earnings ratio basis," says Jim Corridore, an analyst at S&P Capital IQ, who rates UPS a "buy" with a 12-month price target of $95, or 19 times his 2012 earnings estimate of $4.96 a share, up from 2011's $3.84. He adds, "We favor UPS' historical use of its funds to pay dividends and repurchase stock."


Gene Marcial wrote "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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