Wednesday, February 2, 2011

UPS Delivered Simple






With UPS, sometimes less is more. Analysts and investors spend an awful lot of time analysing the minutiae of every aspect of a company's performance, when quite often, the primary driver of the stock price is actually something quite prosaic.

I think this is the case with UPS. UPS delivers packages worldwide. More economic growth, more packages, it is as simple as that. Naturally, there are company specific issues but as an investor our job is to be able to define the key stock price drivers in a perspicacious way.

So what guides the UPS stock price?


UPS Revenue Growth and Global GDP

Simply put, UPS growth is dependent on the economy. I have carried out a linear regression analysis on UPS growth vs. OECD global growth. Here is the raw data for the last eight years

growth%200320042005200620072008200920102011E2012E
OECD 2.0  3.2  2.8  3.1  2.7  0.3  -3.4  2.8  2.3  2.8 
UPS Rev 7.19.212.011.74.53.6-12.09.48.09.0

Source: Earnings View, OECD

The UPS revenue figures have been adjusted for acquisitions. The last two years are estimates which are garnered from OECD forecasts and estimates from the analysis. For the record, the equation that came out was
UPS Rev=3.274*Global Growth+.153
The R^2 for this equation was 90% so it is quite accurate. Analysts are forecasting 7.6% and 7.1% revenue growth for 2011 and 2012 respectively. This suggests some 'surprise' upside, but investors would have to price in a risk premium for the chance of being wrong.

At the current price of $74 I would argue that UPS is fairly priced. The dividend is not great and their cash flow is not that much in excess of long bond yields. I see no reason to take on the extra risk for a return that is likely to match UPS' earnings growth.  However, if there is a dip and I'm confident about GDP growth than it might be worth another look.