Transportation companies generally tend to outperform the market during economic expansionary periods and United Parcel Service (NYSE:UPS) did just that over the past 3 years. However, now the valuation is about right with all of the metrics suggesting that the stock is either fairly valued or slightly overvalued.
Notably, the company is going through a bit of transformation with its purchase of TNT Express this spring. UPS is optimistic about the transaction and said in its press release that the combination will create a global leader in the logistics industry, with annual revenues of more than €45 billion ($60 billion) and will deliver significant benefits for the shareowners, customers, employees and other stakeholders of both companies.
The proposed transaction will accelerate UPS's growth strategy and increase its geographic diversity and ability to provide customers comprehensive solutions. UPS currently estimates annual run-rate pre-tax cost synergies of approximately €400 to €550 million ($525 to $725 million) a year, achieved by the end of the fourth year after closing. UPS believes that the cumulative pre-tax implementation costs related to achieving these synergies will be approximately €1 billion ($1.31 billion) over the four-year integration period.
The success of the transaction should have an impact on the stock's price. Below is an in depth look at the valuation metrics and stock chart.
Valuation: United Parcel Service's trailing 5 year valuation metrics suggest that the stock is fairly valued as there is a mixed message about the valuation metrics compared to their 5 year averages. United Parcel Service's current P/B ratio is 10.6 and it has averaged 7.4 over the past 5 years with a high of 9.9 and low of 5.1. United Parcel Service's current P/S ratio is 1.4 and it has averaged 1.3 over the past 5 years with a high of 1.6 and low of 1. United Parcel Service's current P/E ratio is 19.8 and it has averaged 22.3 over the past 5 years with a high of 34.2 and low of 15.9.
Price Target: The consensus price target for the analysts who follow United Parcel Service is $91. That is upside of 17% from today's stock price of $77.73 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
Forward Valuation: United Parcel Service is currently trading at about $78 a share with analysts expecting EPS of $5.54 next year, an earnings increase of 14% y/y, for a forward P/E ratio of 14. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. Although there are other transportation companies out there, FedEx (NYSE:FDX) is the best comp for UPS. FDX is currently trading at about $89 a share with analysts expecting EPS of $7.42 next year, an earnings increase of 14% y/y, for a forward P/E ratio of 12. This metric suggests that United Parcel Service is overvalued relative to FDX.
Earnings Estimates: United Parcel Service has beat EPS estimates 3 times in the past 4 quarters. The company's EPS figures have come in between -2 cents and 4 cents from consensus estimates or about -2% to 3.8% from analyst estimates. The company's earnings come been relatively close to consensus estimates which suggests that analysts are good at projecting the company's results and share upside from earnings surprises will be limited.
Price Action: United Parcel Service is up 5.5% over the past year, outperforming the S&P 500, which is up 4.7%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $78.80 and above its 200 day moving average, which sits at $71.48.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.