Should You Buy UPS After Its Latest Earnings?
Back in August I answered the question – Should You Buy UPS? To help you keep your retirement portfolio safe.
Today I want to update you on UPS after it released its latest earnings… And tell you whether it’s a buy or not now.
Here’s a quick recap of why I said you should avoid investing in UPS – for now back in August.
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?
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?
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.
This thesis to avoid UPS until it’s cheaper continued playing out after it released its most up to date quarterly earnings on October 28th, 2020. Sort of.
- Total average daily volume increased by double digits in ALL regions of the world.
- Revenue rose 15.9% in the year to year quarterly period to $21.2 billion.
- Operating profit rose 11% in the year to year quarterly period to $2.4 billion.
- And earnings per share rose 11.4% in the year to year quarterly period to $2.24 per share.
This is all spectacular…
So why am I saying that the thesis to continue avoiding UPS until its cheaper continued to play out… Sort of?
Because as its results have gone up its shares have continued skyrocketing.
It hit its all time high of $134.09 per share the day I last wrote to you about UPS in August.
And because its revenues, profits, and cash flows have continued rising so have its shares since then.
To $165.12 per share as of this writing.
This is an increase of 23.1% in a 3 months.
And this means its even more overvalued now than it was in August.
Its P/E is now 124.1.
Its P/CF is 46.5
And its forward P/E is 25.3.
And its enterprise value to operating income – EV/EBIT is 24.3.
On all three metrics at the top I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These show that in only one quarter, UPS went from slightly overvalued to enormously overvalued.
And this means buying its stock does not give you a margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning it going forward.
With UPS being overvalued it makes the investment riskier.
I’ll keep you updated on UPS in the coming months… But for now, continue being patient and wait to buy its stock until it’s cheaper.
You can see how UPS compares to its largest rival Fed Ex in the following articles.
Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.
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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.