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Suman Chatterjee
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Financial analyst-writer for the last 3 years. Writes for a number of financial publications including The Street, Motley Fool and Seeking Alpha. Completed his Bachelors in Business Administration (Finance) with GPA 3.0, currently pursuing Chartered Accountancy from ICAI, India. Specializes in... More
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  • UPS Not So Good - With Or Without TNT 0 comments
    Jan 16, 2013 10:55 AM | about stocks: DPSGY, FDX, TNTEY, UPS

    United Parcel Service Inc. (NYSE:UPS) said Monday it will abandon a 5.2 billion euro ($7 billion) bid for smaller Dutch parcel-delivery company, TNT Express NV (OTCPK:TNTEY) after encountering unexpectedly stiff objections to the deal from the European Commission.

    The acquisition would have been the biggest in UPS's 105-year history. The European Commission, the EU's executive arm, is due to announce its decision on Feb. 5. UPS pre-empted the decision, saying after a meeting with the regulator on Friday that it expects Brussels to block the deal. Needless to say, with the news, the stock price of TNT Express has tanked by over 40% in just a day.

    UPS wanted to buy the smaller firm to challenge Europe's largest, Deutsche Post's DHL (OTCPK:DPSGY) on the European grounds, not to mention the assets in fast-growing Asia and Latin America. The collapse of the deal means a strategy rethink at UPS and as Kurt Hoefer, research analyst at portfolio manager Golub Group in San Mateo, California, says, the company does not have "any alternative but to grow it organically," which means another string of smaller acquisitions coming up soon. But the impact is far greater on TNT. Although TNT is supposed to get 200 million euros as termination fee, it is already struggling in a weak European market and lacks a strategy for developing on its own after nearly a year of negotiations on the merger. Yet this is what TNT said:

    "In a statement, TNT conceded that the 'protracted merger process has been a distraction for management' and that it would now focus on reassuring customers, encouraging employees and making money."

    With FedEx (NYSE:FDX) not showing sufficient interest in TNT, the unanimous opinion among the financial experts is aptly put below.

    "Now TNT will have to continue alone," said Philip Scholte, an analyst at Rabobank. "TNT's management will have to roll up their sleeves, come up with a plan and get down to work."

    But before we talk about any acquisition, let's look at the financial disposition of UPS and whether both the stock price and the company are in the position of further growth of value or not.

    Fundamental Analysis

    Avondale Partners recently upgraded UPS to a buy rating. Not only Avondale, but several other analysts are showering favorable (or at least, neutral) ratings on UPS. 10 equity research analysts have rated the stock with a buy rating, three have issued an overweight rating, thirteen have assigned a hold rating, and one has assigned a sell rating to the stock. The stock presently has a consensus rating of overweight and a consensus target price of $85.32. The stock is currently trading at $79.33. The book value of each share is $7.9, which means the price-to-book ratio is 10.05, far higher than Fedex's 2.12 and TNT's 0.94. Even when the street analysts are calling it a "buy" stock, this high price-to-book ratio is what makes me apprehensive about how far it can go up.

    To know the truth, we must delve deeper into the financial statements. Take a look at the graph below.

    It is clearly noticeable that the company has not reached its pre-Recession profitability yet. Although the revenue at $53.11 billion is the highest since 2003, net income margins linger at 7.16%, much lower than 9.11% in 2004. What is restraining the growth of the bottom line of the company?

    (Numbers in billions)

    (click to enlarge)

    Even the capital expenditure ratio has been steadily going down in recent years. Is the company not being able to utilize its capital properly? On a second look at FactSet data, there have been certain unusual expenses (not categorized under interest or taxes) of $424 million in FY11. And this has been continuing for four straight years since 2007. What is this expense for? It must be noted that when looking at the company statements, I don't see anything like that.

    Declining long-term investments, decreasing long-term liabilities and surging cash assets - all these mean that UPS does not know what to invest in right now. Being rejected at this TNT deal, the company comes back to square one. How will the company increase its profitability? How would the cash be invested to gain better returns in the future? Huge question mark!

    If you look at the graph below, you will see that the stockholder's equity has continuously gone down since 2007, currently at $7.11 billion, yet the net income increased with increase in sales. Now, that definitely results in a high return on equity (ROE) of 54.07%, compared to 13.55% of FedEx. That certainly seems to be inspiring at first look, but when we consider the regular share buybacks, it explains the high ROE.

    Another disturbing fact is the asset acquiring trend in the company. Check the graph below and you will understand that the company has been more focused on acquiring current assets (which includes cash by the way) in the recent years. To add to that, goodwill has been written down in FY11 statements.

    Yes, I see a drop in the long-term liabilities, which means that the company might be less liable to external creditors in the coming few years. This is good when the company's TTM levered FCF is $3.45 billion, almost half of total operating cash flow of $6.81 billion. This metric and the high total debt/equity ratio of 197.9 remind us that the company needs to shed liabilities that might be eating into the shareholder's equity as well. But without any solid long-term assets acquisition, the operating margin of 9.77% and net income margin of 6.11% might not improve over time.

    (click to enlarge)

    Technical Analysis

    Fundamental analysis tells you about long-term prospects while technical analysis tells you about short-term prospects. Take a look at the graph below.

    (click to enlarge)

    Longer upper shadows, longer bodies. This shows that the stock has a stronger accumulation pressure and that the upward price trend might last for some time.

    Higher high's in OBV and PVT lines. When there is a strong upward momentum in the OBV and PVT lines, it means that the price might continue to go up for a few days or even months.

    Higher high's and lower low's in MACD cross overs. Even this shows that the price is trending up and since this is a lagging indicator, it does confirm the price uptrend.

    RSI signal under the 60-mark. Clearly, the stock is still not overbought at the moment. And thus, the price will still go up.

    Coupled with company share buybacks, the price will definitely go up for some time.

    Conclusion

    To sum it all up, if you are a short-term investor, this is a "Buy" at the moment. With the price uptrend and positivity from the deal termination, the stock price is supposed to go up for some time (at least till the next financial report is released).

    For long-term value investors, the company does not seem to have strong fundamentals, and thus, it does not seem so alluring to me at the moment. Notwithstanding the fact that with dividend yield of 2.77% (which is still lower than 4.36% in 2008), compared to 0.57% of FedEx, the stock might be a good source of dividend income.

    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.

    Themes: long-ideas Stocks: DPSGY, FDX, TNTEY, UPS
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