Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies to Research for the EnterprisingÂ Investor.Â Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how United Parcel Service (UPS)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â United Parcel Service, Inc. (UPS) is a package delivery company. The Company delivers packages each business day for 1.1 million shipping customers to 7.7 million consignees in over 220 countries and territories. During the year ended December 31, 2012, it delivered an average of 16.3 million pieces per day worldwide, or a total of 4.1 billion packages. It serves the global market for logistics services, which include transportation, distribution, forwarding, ground, ocean and air freight, brokerage and financing. The Company has three segments: U.S. Domestic Package, International Package and Supply Chain & Freight. In February 2012, it acquired Kiala S.A. In February 2014, United Parcel Service acquired Polar Speed Distribution Ltd.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$55.43|
|Value Based on 0% Growth||$32.49|
|Market Implied Growth Rate||9.40%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
United Parcel Service is suitable for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor has concerns with the low current ratio and the high PEmg and PB ratios. Â The Enterprising Investor’s only initial concern is with the high level of debt relative to the net current assets. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of FedEx Corporation (FDX). Â As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.63Â in 2010 to only an estimated $3.82 for 2014. This lowÂ level of demonstrated growth does not support the marketâ€™s implied estimate of 9.40% earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of United Parcel Service (UPS)Â for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on United Parcel Service (UPS)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in United Parcel Service (UPS)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.