ARMOUR Residential REIT, Inc. (ARR), American Capital Agency Corp. (AGNC), United Parcel Service, Inc. (UPS): Monday’s Top Upgrades (and Downgrades)

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Up on UPS
I have to admit — after witnessing all the navel-gazing going on over Fed policy and what it implies for mREITs, it’s a relief to finally move on to a business whose future doesn’t depend entirely on the course of politics in Washington, D.C. And with United Parcel Service, Inc. (NYSE:UPS) — just upgraded by Barclays Capital — we can finally get back to business.

Barclays this morning upped United Parcel Service, Inc. (NYSE:UPS) to an “overweight” rating, and increased its price target by a whopping 20% — to $106 per share. Granted, UPS was already selling for more than Barclays’ old price target ($88) when the upgrade came out. But still, from today’s price, Barclays’ new price target implies about a 17% gain. So add in a 2.8% dividend yield, and you’re still talking a near-20% potential profit.

Will we get that?

It’s hard to say. On the one hand, the stock’s trailing P/E ratio of 105 certainly doesn’t seem to leave much room for further appreciation. On the other hand, that P/E ratio is based only on the earnings United Parcel Service, Inc. (NYSE:UPS) is allowed to report under GAAP accounting standards. In actual fact, UPS generated $4.6 billion in real free cash flow over the past year — more than 5.5 times its reported GAAP profit.

That puts the stock at roughly an 18.4-times-free cash flow ratio valuation today. With the dividend yield of 2.8%, I’d say therefore that we would want to see the stock growing its profits at about 15% annually to justify today’s price, let alone justify a higher price, such as Barclays is calling for.

Analysts right now project only 11% earnings growth for United Parcel Service, Inc. (NYSE:UPS) over the next five years. While certainly respectable, I think UPS will have to do better than 11% growth to justify today’s prices — and accordingly, I think Barclays’ projection of a 17% gain in the stock is overoptimistic.

Long story short, while United Parcel Service, Inc. (NYSE:UPS) seems less risky than the mREITs, and its business is certainly easier to value — I’d hold off on going long this stock as well.

The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends United Parcel Service.

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