Should You Buy UPS
On July 30th, 2020 United Parcel Service (UPS) released its up to date earnings that sent its shares rising as much as 14% during intraday trading.
And toward its record high share price of $134.09.
EDITOR’s NOTE – As of this writing UPS is selling at $140.52 per share during intraday trading on 7/30/20. By the time you read this, it’s likely closed at its all-time high share price.
Because its quarterly results weren’t only good. They surpassed expectations from analysts. And even increased from last year’s number… In the face of the coronavirus.
Here are some of the highlights from the release…
Revenue rose 13.3% from $18.1 billion in the 2nd quarter of 2019 to $20.5 billion in the 2nd quarter of 2020.
Operating profit jumped 9.5% from an adjusted $2.1 billion in the 2nd quarter of 2019 to an adjusted $2.3 billion in the 2nd quarter of 2020.
And its net income rose 8.8% from $1.6 billion adjusted in the 2nd quarter or 2019 to an adjusted $1.8 billion in the 2nd quarter of 2020.
This all due to a massive increase in demand due to the coronavirus.
Average daily volume increased 22.8% to reach 21.1 million packages per day. And residential delivery demand grew 65.2%.
All of this is fantastic. And are why its shares are skyrocketing.
But should you buy its shares now to take advantage of this coronavirus related trend? Let’s find out.
How Profitable Is UPS?
Let’s do a quick rundown of UPS’ profitability and cash flow. Because profits and cash flow drive the long-term value and pricing and value of a stock over time.
I measure this in part by looking at two important metrics.
Operating profits and free cash flow/sales (FCF/Sales).
On an operating profit basis UPS produced an average operating profit margin of 10.1% per year every year over the last 10 years.
This is fantastic.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment. And UPS is above this level.
What about its FCF/Sales?
Over the last 10 years UPS’ FCF/Sales is 6% on average every year.
Again, this is fantastic.
I look for companies to produce FCF/Sales at higher than 5% on a consistent basis… UPS beats this number too.
Both operating profit and free cash flow are important because they help show you the true profitability of the company.
The more profitable a company is, the higher its value goes over time. And the more money it can spend on innovations and serving customers.
I estimate that far fewer than 5% of all public companies on Earth surpass my minimum thresholds for the 2 metrics above on a consistent basis… This means UPS is a great operating business.
What about its valuation?
Is UPS Undervalued?
As a conservative investor I want to recommend solid, safe, and relatively low risk investments to you.
Often those are achieved by high profit margins and low debt. But it’s also necessary to look at valuation too.
Because if you buy overvalued assets there is a lower margin of safety. And doing this makes the investment riskier.
I want to buy assets that are undervalued in a best-case scenario. And at worst fairly valued.
With markets still near their all-time highs as of this writing most great operating businesses like UPS are overvalued…
And it is too.
• Its current P/E is 25.
• Its current P/CF is 12.1.
• And its forward P/E is 21.7.
I look for companies to sell at ratios below 20 on these metrics to consider the investment undervalued.
These metrics show that UPS is slightly overvalued.
Because of this, I recommend you avoid buying its stock right now.
Put UPS on your watchlist and be patient enough to wait to buy it when you can get it at a cheaper price.
And if you’re looking for some other investment ideas make sure to check out some of our other recent articles below.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.