ARMOUR Residential REIT, Inc. (ARR), American Capital Agency Corp. (AGNC), United Parcel Service, Inc. (UPS): Monday’s Top Upgrades (and Downgrades)

Up on UPS
I have to admit — after witnessing all the navel-gazing going on over Fed policy and what it implies for mREITs, it’s a relief to finally move on to a business whose future doesn’t depend entirely on the course of politics in Washington, D.C. And with United Parcel Service, Inc. (NYSE:UPS) — just upgraded by Barclays Capital — we can finally get back to business.

Barclays this morning upped United Parcel Service, Inc. (NYSE:UPS) to an “overweight” rating, and increased its price target by a whopping 20% — to $106 per share. Granted, UPS was already selling for more than Barclays’ old price target ($88) when the upgrade came out. But still, from today’s price, Barclays’ new price target implies about a 17% gain. So add in a 2.8% dividend yield, and you’re still talking a near-20% potential profit.

Will we get that?

It’s hard to say. On the one hand, the stock’s trailing P/E ratio of 105 certainly doesn’t seem to leave much room for further appreciation. On the other hand, that P/E ratio is based only on the earnings United Parcel Service, Inc. (NYSE:UPS) is allowed to report under GAAP accounting standards. In actual fact, UPS generated $4.6 billion in real free cash flow over the past year — more than 5.5 times its reported GAAP profit.

That puts the stock at roughly an 18.4-times-free cash flow ratio valuation today. With the dividend yield of 2.8%, I’d say therefore that we would want to see the stock growing its profits at about 15% annually to justify today’s price, let alone justify a higher price, such as Barclays is calling for.

Analysts right now project only 11% earnings growth for United Parcel Service, Inc. (NYSE:UPS) over the next five years. While certainly respectable, I think UPS will have to do better than 11% growth to justify today’s prices — and accordingly, I think Barclays’ projection of a 17% gain in the stock is overoptimistic.

Long story short, while United Parcel Service, Inc. (NYSE:UPS) seems less risky than the mREITs, and its business is certainly easier to value — I’d hold off on going long this stock as well.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends United Parcel Service.

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