KeyBanc Calls UPS Valuation 'Reasonable'

Shipping giant United Parcel Services, Inc. UPS is well positioned to take advantage of the stable macroeconomic environment, but the stock's valuation prevents a bullish stance at KeyBanc.

The Analyst

KeyBanc Capital Markets' Todd Fowler initiated coverage of UPS with a Sector Weight rating and no assigned price target.

The Thesis

UPS said this month it has created a path towards an incremental $1.1 billion to $1.3 billion of operating income by 2022 from revenue growth and cost reduction initiatives and is also targeting $800 million to $1 billion of annual savings by 2021. Fowler said these initiatives should help the company earn $8.60 per share in 2020 and $10.00 to $10.50 by 2022.

Despite 2018 being year one of higher investment spending, Folwer said free cash as a percentage of gross revenue should still come in above the eight-year average at 7 percent, or around $5 billion. This should be sufficient to support efficiency investments, return capital to shareholders, buyback its stock and inorganic growth investments. Within a few years when capital expenditure normalizes, the company should see an extra $2 to $3 billion of free cash flow annually.

Despite an encouraging outlook ahead, the stock's valuation needs to be considered.

The stock is trading at 16.1 times 2018 estimated EPS of $7.25, 14.9 times 2019 estimated EPS of $7.85 and 14.4 times on an EV/EBITDA basis for 2019. By comparison, the median forward P/E multiple has been 18 times with a range of 14 to 20 times and median EV/EBITDA multiple at 13 times with a range of 10 to 17 times. As such, the current valuation is "reasonable" although downside is limited due to a favorable free cash profile.

Price Action

Shares of UPS were trading marginally higher Thursday at $117.17.

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Photo courtesy of UPS.