United Parcel Service, Inc. (NYSE:UPS) is coming off of a poor 2012. While the company’s revenue edged up 2% compared to the previous year, its costs increased at a faster rate; in particular, UPS spent $33 billion on compensation and benefits for the year, up from less than $28 billion in 2011, partly due to increases in pension expenses. This was a major contributor to operating income dropping 78% to $1.3 billion, with earnings decreasing at a similar rate. While UPS’s cash balance increased, this was primarily due to the company issuing long term debt yet actually using less cash on buybacks than in 2011- cash flow from operations (which adds back many pension related expenses) showed little change.
Even in terms of adjusted earnings per share, United Parcel Service, Inc. (NYSE:UPS) currently trades at 19 times its trailing earnings. Wall Street analysts are forecasting considerable growth in earnings per share over the next couple of years- specifically, the forward P/E is 15- but given the weakness in the company’s revenue numbers during 2012 we are skeptical that the company can meet those expectations. Even if UPS did hit its targets, that valuation would require moderate earnings growth beyond that point in order to justify the current price; again, even setting aside issues related to margins we don’t see the business performing well enough on the top line. The stock does pay a dividend yield of 3%, going by current prices and recent dividend levels, though income investors might want to avoid the stock on valuation as well and look at other services or transportation stocks.
Renaissance Technologies, whose founder Jim Simons is now a billionaire, reduced its holdings of United Parcel Service, Inc. (NYSE:UPS) by 19% during the fourth quarter of 2012 to a little over 2 million shares (see Renaissance’s stock picks). Greenhaven Associates, managed by value investor Edgar Wachenheim, was another major shareholder, reporting a position of 3.8 million shares (find Wachenheim’s favorite stocks). We also tracked Tiger Cub Lee Ainslie’s Maverick Capital initiating a new position of about 800,000 shares in UPS between October and December (check out more stocks Ainslie was buying).
The closest peer for UPS is FedEx Corporation (NYSE:FDX), which experienced its own problems in its most recent quarter (which ended in February). Similarly to UPS, the company’s revenue was up slightly compared to the same period in the previous fiscal year but net income dropped by over 30%. FedEx is valued at a discount to UPS in terms of its forward earnings, with a P/E multiple of 13, but as with United Parcel Service, Inc. (NYSE:UPS) those estimates assume considerable improvements on the bottom line in the near term. With revenue growth rates looking fairly low, we think FedEx should be avoided as well.
We can also compare UPS to C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), Expeditors International of Washington (NASDAQ:EXPD), and UTi Worldwide Inc. (NASDAQ:UTIW). The forward earnings multiples of these companies are in the 17-18 range, which actually represents a premium to their larger peers (assuming, of course, that the sell-side is correct in their projections). Expeditors International of Washington (NASDAQ:EXPD) and UTi Worldwide appear to be in a similar position to UPS and FedEx Corporation (NYSE:FDX), with revenue showing little change in their most recent quarterly reports versus a year earlier but the former company showing a 9% decline in earnings while UTi Worldwide Inc. (NASDAQ:UTIW) was actually unprofitable. CH Robinson’s financials look better- for example, revenue grew 16% compared to the fourth quarter of 2011- and while we wouldn’t put too much weight on the Q4 performance that company at least looks somewhat interesting particularly compared to the rest of the industry.
Perhaps if United Parcel Service, Inc. (NYSE:UPS) does start reporting results that put it on track to meet analyst expectations we might start to think of it as offering “growth at a reasonable price.” However, revenue numbers for 2012 do not have the company growing fast enough to make it a good buy at current levels from our perspective. If there is a peer that is worth taking a closer look we think that it would be C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW).
Disclosure: I own no shares of any stocks mentioned in this article.
