ModernGraham Quarterly Valuation Of United Parcel Service

Here is a look at how United Parcel Service (UPS) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

The package delivery industry is a sector of the economy that will likely not have any fundamental changes to it in the foreseeable future. Yes, it's possible that at some point drones will replace humans as a delivery method, but the industry would still revolve around the delivery of packages. So it stands to reason that the industry may be a good addition to an investor's portfolio as stability over the long-term is likely. But narrowing the investment to a given carrier requires fundamental analysis of the possibilities based on historical performance. By using a ModernGraham analysis, one can maintain a systematic analysis across companies and even industries to easily compare one potential investment's risk level and opportunity for value against another potential investment.

Defensive and Enterprising Investor Tests:

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS


2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL


3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS


4. Dividend Record - has paid a dividend for at least 10 straight years - PASS


5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL


6. Moderate PEmg ratio - PEmg is less than 20 - FAIL


7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS


2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL


3. Earnings Stability - positive earnings per share for at least 5 years - PASS


4. Dividend Record - currently pays a dividend - PASS


5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

MG Value	$59.52
MG Opinion	Overvalued
Value Based on 3% Growth	$45.44
Value Based on 0% Growth	$26.64
Market Implied Growth Rate	11.12%
NCAV	-$21.61
PEmg	30.74
Current Ratio	1.76
PB Ratio	24.57

Balance Sheet - 9/30/2013

Current Assets	$13,758,000,000
Current Liabilities	$7,821,000,000
Total Debt	$10,897,000,000
Total Assets	$37,476,000,000
Intangible Assets	$2,951,000,000
Total Liabilities	$33,834,000,000
Outstanding Shares	929,000,000

Earnings Per Share

2013 (estimate)	$4.61
2012	$0.83
2011	$3.84
2010	$3.48
2009	$2.16
2008	$2.94
2007	$0.36
2006	$3.86
2005	$3.47
2004	$2.93
2003	$2.55

Earnings Per Share - ModernGraham

2013 (estimate)	$3.13
2012	$2.48
2011	$3.06
2010	$2.63
2009	$2.32
2008	$2.51

Conclusion:

United Parcel Service intrigues the Enterprising Investor, but it would be much more interesting if there was stronger growth. As it stands, the company is not suitable for the Defensive Investor because of its lack of sufficient earnings growth over the ten year period, its low current ratio, and its high PEmg and PB ratios. The Enterprising Investor is interested, and should feel comfortable proceeding with further research into the company, beginning with a review of ModernGraham's valuation of Fedex Corporation (FDX).

From a valuation perspective, the company has only grown its EPSmg (normalized earnings) from $2.52 in 2008 to an estimated $3.13 for 2013. This level of growth is a little disappointing, and the ModernGraham valuation model does not return a value supportive of the market's current price. As a result, the company would appear to be overvalued at the present time.

What do you think? What value would you put on United Parcel Service (UPS)? Should the company be suitable only for Enterprising Investors? Is there a company you like better?

Disclosure: The author did not hold a position in Fedex Corp (FDX) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of United Parcel Service

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