United Parcel Service, Inc. (NYSE:UPS) is coming off of a poor 2012. While the company’s revenue edged up 2% compared to the previous year, its costs increased at a faster rate; in particular, UPS spent $33 billion on compensation and benefits for the year, up from less than $28 billion in 2011, partly due to increases in pension expenses. This was a major contributor to operating income dropping 78% to $1.3 billion, with earnings decreasing at a similar rate. While UPS’s cash balance increased, this was primarily due to the company issuing long term debt yet actually using less cash on buybacks than in 2011- cash flow from operations (which adds back many pension related expenses) showed little change.
Even in terms of adjusted earnings per share, United Parcel Service, Inc. (NYSE:UPS) currently trades at 19 times its trailing earnings. Wall Street analysts are forecasting considerable growth in earnings per share over the next couple of years- specifically, the forward P/E is 15- but given the weakness in the company’s revenue numbers during 2012 we are skeptical that the company can meet those expectations. Even if UPS did hit its targets, that valuation would require moderate earnings growth beyond that point in order to justify the current price; again, even setting aside issues related to margins we don’t see the business performing well enough on the top line. The stock does pay a dividend yield of 3%, going by current prices and recent dividend levels, though income investors might want to avoid the stock on valuation as well and look at other services or transportation stocks.
Renaissance Technologies, whose founder Jim Simons is now a billionaire, reduced its holdings of United Parcel Service, Inc. (NYSE:UPS) by 19% during the fourth quarter of 2012 to a little over 2 million shares (see Renaissance’s stock picks). Greenhaven Associates, managed by value investor Edgar Wachenheim, was another major shareholder, reporting a position of 3.8 million shares (find Wachenheim’s favorite stocks). We also tracked Tiger Cub Lee Ainslie’s Maverick Capital initiating a new position of about 800,000 shares in UPS between October and December (check out more stocks Ainslie was buying).
The closest peer for UPS is FedEx Corporation (NYSE:FDX), which experienced its own problems in its most recent quarter (which ended in February). Similarly to UPS, the company’s revenue was up slightly compared to the same period in the previous fiscal year but net income dropped by over 30%. FedEx is valued at a discount to UPS in terms of its forward earnings, with a P/E multiple of 13, but as with United Parcel Service, Inc. (NYSE:UPS) those estimates assume considerable improvements on the bottom line in the near term. With revenue growth rates looking fairly low, we think FedEx should be avoided as well.