try age
Better and Bolder represents a well-defined corporate strategy on which many executives rely heavily. Better is putting the customer experience first and constantly improving efficiency. Boldness means creating greater value for our customers and United Parcel Service (New York Stock Exchange: UPS) through sustainable growth and the use of cutting-edge digital solutions.
By analyzing the fundamentals of revenue and profit factor, we can say that we are currently at an annual growth rate of 8.9% (revenue) over the past five years and a stable EBIT margin of 13.7% (TTM), which is our corporate strategy. . , has delivered excellent results, especially when compared to its main competitors. ROCE (Return on Capital Employed) also shows a growth trend supported by efficient use of capital.
My concern relates to so-called hidden debt. The company is constantly increasing the cost of leasing, which can represent a risk if certain limits are exceeded.
I think the market is aware of the results the company has achieved and the stock is overvalued at the moment. If it breaks below $150, this could represent an interest rate to open a long position. My United Parcel Service, Inc. charges are pending at this time.
brief overview
United Parcel Service, Inc. is a global logistics company with over 100 years of history (founded in 1907). It is also the world’s top player in package delivery and the leader in global supply he chain solutions.
UPS offers transportation, delivery, warehousing logistics, ocean and air freight solutions.
UPS has operations in North America and Latin America, Europe, the Middle East, Africa, and Asia Pacific.
The company divides into two reporting sectors: US Domestic Packages and International Packages.
Simplicity and speed can describe two keywords of our company philosophy and strategy of putting customer service first.
financials and highlights
Earnings and Profitability
UPS 10-K Forms + Creator Graph
The graph depicts a linearly increasing trend in both revenue and EBIT margin. Notably, revenue has registered an annual growth rate (CAGR) equivalent to 8.9% since 2018, with EBIT hitting his double digits. A staggering sequential growth of 9.9% to 13.7%. Notably, EBIT growth was entirely focused on the top of the income statement or gross margin, up more than four percentage points from 20.5% to 24.7%. We can assume the excellent work the company has done in terms of price/product mix, as well as direct cost efficiency improvements at the same time.
An example of how they are succeeding and improving efficiency is described in their latest earnings call.
“Our biggest productivity initiative is our Total Service Plan, which is executing on schedule. Since our launch on July 11th, we have seen a 13% improvement in the timeliness of our driver dispatches.”
When
“The big turning point for us is that we have invested in our fastest ground ever, improving transit times, and we are leading or par for the course in 17 of the top 25 markets. We offer service, Saturday pick-up.This has made a big difference in our business.”
UPS 10-K Forms + Creator’s Compute
Another excellent example of good profitability is illustrated by the analysis of return on capital employed. We’ve seen how the EBIT margin trend is growing strongly.ROCE is accompanied by a multiplier that is also determined by the capital turnover ratio.In 2019, the increase in the net value of facilities and equipment led to a slight Although declining, capital turnover began to grow in line with revenue trends, generating $2 in sales (TTM) for every dollar of capital used in the company.
ROCE grew faster than EBIT thanks to a combination of Capital Turnover growth. The latest figure (TTM) of 26.7% represents a peak of prominence.
Free cash flow, EPS, dividend
Seeking Alpha + Author Graph
The graph (yellow bar) shows EPS growth. From 2018, we see steady growth at an annualized rate of 16.2% (up from $5.68 to $10.34 per share). EPS growth over the last five years was 16.2%. This is higher than the previous decade’s record (9.1%). This implies an acceleration following the reasons identified in the EBIT trend (see previous paragraph).
Blue bars represent free cash flow (“FCF”) per share. The trend is variable, but still growing (Operating cash flow is growing at a 6.9% lower annual rate than EPS). This trend also shows that companies are always able to convert profits into cash flow. Free cash flow is also a strength, as it enables extraordinary businesses such as strategic acquisitions such as the Bomi Group, as UPS management emphasized in its last earnings call.
“Another better and bolder example is the pending acquisition of Bomi Group. In addition to UPS Premier’s recent expansion in Europe, we are on track to generate at least $10 billion in healthcare revenue in 2023.”
So the next target can also be identified in terms of revenue or $10 billion in a very strategic sector (Healthcare).
Gray bars show dividend per share trends. As you can see, the bar follows the EPS trend and is lower than the FCF bar. This trend shows dividend sustainability and good long-term growth (although it has been 11.3% p.a. over the last five years).
Therefore, it is possible to demonstrate constant and sustained growth in earnings, cash flow and dividends (currently 3.48% dividend yield). The question is whether the company is investing enough to sustain those growth rates.
In answering this question, the ratios given by spending in terms of CAPEX and depreciation values are helpful. The orange line in the graph shows the trend of the ratio. In 2018 and 2019, UPS made significant investments ($6.3 billion annually) in asset maintenance. This spending will drop significantly in 2022 ($3.9 billion) and is very close to depreciation ($3 billion). As a result, the ratio went from 2.85 to 1.28, which is a positive trend. The company probably spent a lot of money five years ago, but today those investments are paying off.
evaluation
Earning power value model
Conservatively, we use the EPV (Earning Power Value) method to calculate stock prices to assume that cash earnings are constant over time.
The method starts with EBIT. The second step is to add depreciation and amortization and then subtract CAPEX for business continuity.
The result is the cash transaction profit.
Then deduct the tax by calculating the amount using the actual tax rate paid by the company.
The result is after-tax cash transaction earnings.
At a minimum, to calculate the total enterprise value of a company, divide the after-tax cash earnings by the interest rate that we define as appropriate for this type of company (UPS is a large, low-risk company, so we divide it by 8%). decided to use it).
The result is Total Company Earnings Power Value. Dividing the result by the total number of shares gives the value per share.
The table below shows the UPS calculations.
| EBIT | $13,828.00 |
| depreciation | $3,054.00 |
| capital investment | $-3,902.00 |
| spot trading profit | $12,980.00 |
| Effective tax rate | 21.9% |
| tax | $-2,842.62 |
| Cash profit after tax | $10,137.38 |
| interest rate | 8.0% |
| EPV | $126,717.25 |
| share the problem | 865.0 |
| EPV per share | $146.5 |
$146.5 represents the stock valuation using the EPV method. Comparing this data to the current market price ($179.5) shows that the current price already factors in future earnings growth and is overvalued by 22.5% (=(179.5-146.5)/146.5) .
FCF/share model
To define the maximum purchase price, we also use a formula based on FCF/equity and interest rate.
The formula is:
Maximum purchase price = cash earnings per share / interest – 20% (safety discount).
At $11.58 TTM cash earnings per share.
Interest rate = inflation rate = 7.75%.
Maximum price before safety discount = 11.58/7.75%= $154.4.
Maximum price at 20% discount = $128.7.
Under the FCF/Share analysis, the actual price of $179.5 seems overvalued.
Both methods (converging below $150) show that the current stock price already includes future earnings growth. In my opinion, if the market offers him an opportunity to buy below $150, it may be appropriate to enter a long position.
peer
To compare UPS to similar companies in terms of market capitalization in the air freight and logistics sector, we have defined the following peers.
• Deutsche Post AG (OTCPK:DPSGY)
• FedEx Corporation (FDX)
• DSV A/S (OTCPK:DSDVY)
looking for alpha
Use Seeking Alpha’s Quant Ratings to give parity verdicts across different companies with ‘hold’ ratings.
Digging deeper into the parameters that characterize UPS, we can look at the profitability factors.
looking for alpha
The table shows the main profitability parameters comparing different companies. We highlight that UPS’s gross profit margin (24.73%) is the best result (on par with FedEx). In terms of EBIT margin, UPS’s 13.68% is by far the best indicator compared to second place DSV (10.4%). Finally, a $14 billion cash-from-operation also underscores the company’s strengths relative to its competitors.
Bottom line, when you look at the company from a profitability standpoint, it looks like the best by far.
Hidden Liabilities as a Potential Risk
UPS 10-K Forms + Creator’s Compute
UPS makes extensive use of leasing and rental of equipment (factories, aircraft, trucks, etc.), which represents hidden liabilities not reflected in balance sheet items. To accurately weigh these costs, we calculated the lease capitalization using an annual rental cost multiplier of 7. The blue bar in the graph represents the trend of this hidden debt item.
As you can see, the trend is growing and if the fixed price to cover falls too low it could become a risk factor. The parameter indicates how many interest payments the profit can make on the lease and rental costs.
The formula is:
Fixed Charge Cover = (EBIT + Operating Lease Expenses)/(Net Interest + Operating Lease Expenses).
Higher is better, and going down to 5 can represent risk.
The orange bar shows the evolution of fixed fee coverage. In 2020, the parameter has dropped to a value of 4.73 and today stands at 7.04. Going below 5 in the future is a red flag.
Finally, the graph represents ROCE recalculated with capital usage adjusted for lease capital. The trend is growing and the final value of 20.6% represents a very positive number.
Conclusion
In terms of revenue growth and profitability, I believe UPS is the best solution for investing in the air freight and logistics market. Fundamental indicators identify solid, fast-growing companies. Don’t forget the cash flow derived from your business. This well covers the dividend and also the potential for capital to be used for strategic acquisitions. United Parcel Service, Inc.’s stock valuation looks a bit high, so my advice is to wait for a possible price correction (below $150) before opening a long position. United Parcel Service, Inc. charges are pending.
