United Parcel Service Is A Buy

| About: United Parcel (UPS)

United Parcel Service (NYSE:UPS) is the largest express/package delivery company in the world. UPS is also a major supplier of business logistics/services through its Commerce Facilitation business. U.S. domestic package delivery is the main focus of UPS's business with 61% of total revenues coming from this business segment. International package delivery comprises about 22% of total revenues and UPS's Commerce Facilitation business comprises about 17% of total revenues.

Domestic package delivery is what UPS is best known for and its iconic brown trucks deliver about 84% of UPS's domestic packages that are delivered in the continental United States. Furthermore, package delivery services are available to every address in the continental United States. UPS also operates a next-day air service that delivers packages before 12 noon to locations that correspond to about 90% of the population of the 48 contiguous United States.

International package delivery is an area that will likely provide substantial future growth for UPS. UPS delivers packages to over 200 countries throughout the world and delivers packages in one to two days to every significant center of commerce on the planet. Both domestic delivery and export delivery services are provided depending on whether a package must cross international borders. Most of the near-term growth in UPS's international business is expected to come from European Union countries but investments in Asian infrastructure will likely make Asia the international growth driver for UPS in the long term.

UPS's Commerce Facilitation segment consists of supply chain logistics, freight services, and financial services provided to business customers. The Supply Chain Solutions Group provides; freight services using multi-modal freight transportation, international trade management, and distribution/logistics services. UPS Capital provides financial services such as; import/export lending, global trade finance, and asset-backed lending. Consulting services are provided through the UPS Consulting Group, which provides logistics engineering and supply chain design services to business customers.

In 2012, UPS attempted to acquire TNT Express to expand its European operations. However, in January 2013, the European Union took action to stop the acquisition and UPS was forced to give up on its plan to add TNT Express to its international portfolio. Had the acquisition gone through, it would have significantly increased UPS's business operations in Europe. In our opinion, the termination of this deal is not as bad as it seems because UPS can make up for the loss of this deal by acquiring many smaller delivery companies as well as growing its current European business through organic growth.

One positive regarding the termination of the TNT Express deal is that UPS has extra cash on hand to pay increased dividends or initiate a significant share repurchase program. UPS has a history of paying generous dividends and repurchasing shares at attractive prices. Going forward, analysts estimate that UPS will earn $4.98/share in 2013 and $5.67 in 2014 compared with 2012 operating earnings of $4.53/share.

We believe that UPS is a good buy for the following reasons:

  1. UPS is selling at a relatively inexpensive forward earnings multiple of 14.7 times 2013 projected earnings.
  2. UPS has a solid balance sheet with $7.92 billion in cash and a manageable debt burden with a 16.2% debt to market capitalization ratio.
  3. UPS has an attractive dividend yield of 3.00% and a history of consistent dividend increases with an 8.8% increase in the dividend early this year.
  4. S&P has a Buy rating on the stock (4 out of 5 stars) and a 12-month price target of $94.00 per share, which is significantly above today's price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.