Friday, 17 January 2014

UPS: an update on 'what price logistics?'

Early in December I reviewed the investment case for the global logistical company UPS.  You can find that report here.  Back then I concluded that:

'So pushing through US$100 recently, still good value?


Well, with an EV of US$100bn (funny how numbers move to that round number level sometimes), a 5% free cash flow yield and a commitment to return 80%+ of this via a buyback (and a 2% yield) there are some good metrics to grab hold of.  Earnings-wise - extrapolating hopes for 2013-14 - the share trades on x12.5 EV/ebit i.e. not super cheap but reflective of some of the positive themes above.

Global logistics stocks move around on hopes and fears for the global economy but there are some strong themes here.  In short, any material plunge below US$100 is an opportunity.  Worth keeping an eye on'. 

Are we building up into an opportunity?  I say that because earlier today UPS came out with a surprise (and early) comment on its Q4 earnings.  Here's an excerpt from the press release (with my emphasis added):

'UPS today announced that it anticipates fourth quarter 2013 diluted earnings per share of $1.25. Full-year 2013 adjusted diluted earnings per share are expected to be $4.57, below the previously provided guidance of $4.65 to $4.85...U.S. results were negatively impacted by the challenges of the compressed peak season coupled with an unprecedented level of online shopping that included a surge of last-minute orders. In an effort to maintain service standards and commitments, UPS took extraordinary measures deploying additional equipment and people. For example, the company utilized 85,000 temporary employees, 30,000 more than planned. Also, weather events in December weighed on results'
   
So the combination of weather, late online ordering and the costs of a higher temporary workforce has hurt earnings which will now, for the full year, come in around 4% below the previous mid-point guidance.

Not good but - as noted in my December report - the investment themes around this company are still positive and the view for this year remains undiminished:
 
'UPS expects full-year 2014 diluted earnings per share to grow in line with its long term targets of 10-to-15%, compared to 2013 adjusted results'

I was looking for a 'material plunge below US$100'.  Looking at the chart, the share moves in US$5 increments.  That makes the first buying opportunity US$95.


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