December 25, 2014 United Parcel Service Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 02/04/2009 Current Price (12/24/14) $112.41 Target Price $118.00 52-Week High $112.45 52-Week Low $93.62 One-Year Return (%) 9.99 Beta 0.91 Average Daily Volume (sh) 3,477,548 Shares Outstanding (mil) 905 Market Capitalization ($mil) $101,731 Short Interest Ratio (days) 3.62 Institutional Ownership (%) 53 Insider Ownership (%) 1 Annual Cash Dividend $2.68 Dividend Yield (%) 2.38 5-Yr. Historical Growth Rates Sales (%) 4.5 Earnings Per Share (%) 13.5 Dividend (%) 9.1 using TTM EPS 23.6 using 2014 Estimate 22.7 using 2015 Estimate 19.9 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (UPS-NYSE) United Parcel Service, or UPS, performed impressively in the third quarter of 2014, reporting higher than expected earnings and revenues. Growth was witnessed across all the segments of the company. We believe that the company s strategic investments, technology-backed operations and enhanced worldwide network will strengthen its market position and safeguard shareholder value against unfavorable market dynamics. The improving economic scenario is also benefiting the company. We remain concerned about threat from competitors. Labor unionization is another challenge confronting the company. We believe that the stock is fairly valued at current levels with limited scope for upside. Consequently, we retain our Neutral recommendation on the stock. Low Type of Stock Large-Growth Industry Trans-Air Frght Zacks Industry Rank * 160 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 13,136 A 13,349 A 13,071 A 14,571 A 54,127 A 2013 13,434 A 13,507 A 13,521 A 14,976 A 55,438 A 2014 13,779 A 14,268 A 14,290 A 15,860 E 58,118 E 2015 14,499 E 15,019 E 15,147 E 16,619 E 61,284 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $1.00 A $1.15 A $1.06 A $1.32 A $4.53 A 2013 $1.04 A $1.24 A $1.16 A $1.25 A $4.69 A 2014 $0.98 A $1.21 A $1.32 A $1.45 E $4.96 E 2015 $1.20 E $1.35 E $1.44 E $1.65 E $5.64 E Projected EPS Growth - Next 5 Years % 11 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Based in Atlanta, United Parcel Service, Inc. is the world's largest express carrier and package delivery company. The company provides specialized transportation and logistics services in the United States and internationally. UPS offers a range of supply chain solutions, such as, freight forwarding, customs brokerage, fulfillment, returns, financial transactions, and repairs. UPS transports millions of packages each business day across the globe. UPS operates a ground fleet of approximately 101,000 vehicles in the United States. The company also operates an air fleet of 523 aircraft. Its primary air hub is in Louisville, KY. Regional air hubs are located in Hartford, CT; Ontario, Canada; Philadelphia, PA, and Rockford, IL. Its international air hub is in Cologne, Germany, while other hubs are located in Miami, FL; Canada; Hong Kong; Singapore; Taiwan; China, and the Philippines. The company operates a global transportation infrastructure and offers a portfolio of services. UPS has the following three core business segments: The U.S. domestic package operations (accounted for about 61% of 2013 revenue) involve ground delivery services, deferred air delivery, and next day air services. The International package operations (22%) encompass delivery of letters, documents and packages to more than 220 countries and territories worldwide, including shipments outside the U.S. as well as shipments from or to the United States with another country as the destination or origin point. The Supply chain and freight segment (17%) is engaged in logistics, excess value package insurance, and freight and ancillary services. The forwarding and logistics business provides services in more than 175 countries and territories worldwide, and includes supply chain design and management, freight distribution, customs brokerage, mail and consulting services. Freight segment offers a variety of less-than-truckload (LTL) and truckload (TL) services to customers in North America. Other business units within this segment include Mail Boxes, etc. (the franchisor of Mail Boxes, etc. and the UPS Store) and UPS Capital. Equity Research UPS Page 2
REASONS TO BUY UPS performed encouragingly in the third quarter of 2014 reporting higher than expected earnings and revenues. Growth was witnessed across all segments. The company expects 2014 earnings in the range of $4.90 to $5.00, representing 7% 9% year over year growth. We believe that the company is well-positioned to achieve the guidance. Consequently, the Zacks Consensus Estimate of $4.96 for 2014 is lies well within the guidance range. We are impressed by the company s efforts to expand. In Dec 2014, the company announced that it has agreed with Poland-based investment fund ORTIE to acquire its pharmaceutical logistics company Poltraf. Through this impending acquisition (expected to close in the first half of 2015), UPSis aiming to strengthen its position as a leading provider of compliant healthcare supply chain solutions across Europe. Moreover, in Oct 2014. UPS launched UPS My Choice and the UPS Access Point network in Canada, bringing seamless service to offer busy online shoppers and global retailers new personalized solutions to manage residential package deliveries. UPS My Choice, which provides customizable online and mobile services and was introduced in the U.S. in 2011, will be available to consumers in 15 additional countries, apart from Canada. Moreover, the company has introduced route optimization software called ORION, which will offer On-Road Integrated Optimization and Navigation. The company plans to have 45% of the driver route using the technology by the end of 2014, optimizing delivery routes, saving fuel and reducing carbon dioxide emissions. Further, it is planning to implement Hub Automation to enhance the ability to recover and maintain services during natural calamities. UPS provided an encouraging long-term projection at its investor day in Nov 2014. The company expects the top line to grow in the band of 5% to 7% annually over 2015-2019. In that period, the bottom line projected to grow at 9% to 13% annually. Return on invested capital is projected in the band of 25% to 30%. Moreover, revenues for 2015 are projected to grow at 5% to 6% over the estimated 2014 levels. Earnings per share for 2015 are projected in the band of $5.45 to $5.70, up 10% to 15% over the estimated 2014 levels. We are also encouraged by the company s projection to invest approximately $2 billion over the next five years to expand its infrastructure in Europe, Asia and the Americas. UPS continues to return cash to shareholders in the form of increased dividends and share repurchases. In Feb 2013, UPS raised the dividend for its outstanding Class A and Class B shares by 8.8% to $0.62 per share followed by a dividend hike of 8.1% to $0.67 in Feb 2014. The company has paid $1.8 billion through dividends in the first nine months of the year. In terms of share buybacks, the company has repurchased 21 million shares in the first nine months of the year at $2.1 billion. At its investor day in Nov 2014, the company said that it intends to repurchase shares worth in excess of $15 billion during 2015-2019. In 2015 itself, the company expects to buy back shares worth $2.7 billion. REASONS TO SELL The company derives a significant portion of its revenues from international operations, including business in the emerging markets. Emerging markets are more volatile than those in the developed world, and any broad-based downturn in these markets could reduce the company s revenues and adversely affect the financial position. Additionally, the company faces significant market risks arising from fluctuations in foreign exchange rates, commodity prices and interest rates. Equity Research UPS Page 3
The company competes in highly competitive markets. It faces significant competition on a local, regional, national, and international basis. The company s competitors include postal service companies in the U.S. and other nations, various motor carriers, express companies, freight forwarders, air couriers and others. The transportation industry continues to consolidate and competition remains strong. As a result of the consolidation, the competitors may increase their market share and improve their financial capacity, thereby strengthening their competitive positions. Approximately 60% of United Parcel Service s employees are union members. In Apr 2013, the company had entered into a tentative agreement with the Teamsters on two new five-year contracts in the U.S. Domestic Package and UPS Freight business units. In Jun 2013, the Teamsters Union and UPS Freight agreed to an extension of the current UPS Freight National agreement in order to give both parties the time for further negotiations. On Apr 24, 2014, the company s contract with International Brotherhood of Teamsters was approved and it came into effect from the following day for all UPS employees covered under the agreement. However, if the company fails to comply with the terms of the agreement, there exists the possibility of strikes, work stoppages and slowdowns by the employees that will hamper the company s operations. RECENT NEWS UPS Beats on Earnings and revenues in Q3 Oct 24, 2014 United Parcel Service reported third-quarter 2014 adjusted earnings per share of $1.32, beating the Zacks Consensus Estimate of $1.28. The bottom line also grew 13.8% from $1.16 earned per share in the corresponding quarter last year. Total revenue for the quarter grew 5.7% year over year to $14,290 million, ahead of the Zacks Consensus Estimate of $14,203 million. Total adjusted operating profit climbed 8.3% year over year to $1,954 million. Revenue Segments US Domestic Package revenues rose 5.3% year over year to $8.7 billion in the reported quarter. Operating profit grew $1.3 billion, up 7.8% from the year-ago quarter. Average daily volume increased 6.9% on Deferred, Ground and Next Day Air volume expansion. Revenue per piece dipped 2.0% year over year given unfavorable changes in product and customer mix that offset pricing improvements. International Package revenues rose 5.5% year over year to $3.2 billion given growth in U.S. export products. Operating profit grew $460 million, up 10.3% from the year-ago quarter. Operating margin grew 70 basis points year over year to 14.5%. Average daily volume grew 6.7% year over year on strong international shipments in Europe and the Asia-to-Europe trade lane. Revenue per piece declined year over year at $17.98. Supply Chain and Freight revenues grew 7.4% year over year at $2.4 billion due to growth in the Freight and Distribution business units. Adjusted operating profit rose 7% to $215 million, resulting in an operating margin of 8.9%. Equity Research UPS Page 4
Liquidity UPS generated free cash flow of $2.7 billion and spent $1.4 million at the end of the third quarter. The company repurchased 20.6 million shares worth $2.1 billion and paid dividends of $1.8 billion (8.1% higher compared to year ago) over the nine month-period ending Sep 30, 2014. Guidance UPS expects shipments in Dec 2014 to grow 11% year over year, owing to holiday season sales. Further, the company maintains its plan to increase operating expenses by $175 million and to incur $500 million in capital expenditures in 2014 to address capacity issues and peak-season related operational requirements. UPS retains its adjusted earnings per share projection to $4.90 to $5.00, representing 7% 9% growth over 2013 adjusted figures. VALUATION UPS current trailing 12-month earnings multiple is 23.6 compared with the industry average of 20.4 and 19.1 for the S&P 500. Over the last five years, the company s shares have traded in a range of 15.5-27.7x trailing 12-month earnings. The stock is trading at a premium to the industry average and the S&P 500 benchmark, based on forward earnings estimates. We believe that the booming health care segment, shipment and yield growth along with productivity improvements will help UPS to fuel its future profitability. Moreover, the company continues to enhance shareholder returns in the form of higher dividends and share repurchases. However, labor unionization and competitive threats keep us cautious on the stock. We believe that the stock is fairly valued at current levels with limited scope for upside. Consequently, we retain our Neutral recommendation on the stock. Our target price of $118 is based on 20.9x our earnings estimate for 2015. Equity Research UPS Page 5
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low United Parcel Service (UPS) 22.7 19.9 11.0 16.8 23.6 27.7 15.5 Industry Average 19.1 15.7 14.5 12.0 20.4 28.0 13.8 S&P 500 17.7 16.6 10.7 16.0 19.1 19.6 12.0 Deutsche Post AG (DPSGY) 15.8 15.1 11.1 8.6 14.5 19.1 12.2 Avianca Holdings S.A. (AVH) 11.5 6.1 6.6 FedEx Corporation (FDX) 19.7 16.2 14.3 11.1 22.2 31.7 12.9 TNT Express N.V. (TNTEY) 18.3 13.9 29.5 12.8 56.2 46.7 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA United Parcel Service (UPS) 17.8 26.3 7.1 73.6 1.7 2.4 11.9 Industry Average 3.8 3.8 3.8 19.0 0.8 0.9 8.6 S&P 500 7.2 9.8 3.2 23.3 1.9 Equity Research UPS Page 6
Earnings Surprise and Estimate Revision History Equity Research UPS Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of UPS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform - 15.8%, Neutral - 77.8%, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Maharathi Basu Editor Anindita Last uploaded by Kaustav QCA Nalak Das Reason for update 3Q14 Earnings Equity Research UPS Page 8