UPS – potential share buy back and strategic acquisition scenarios

Can UPS unlock shareholder value?

UPS’ stock continues to lag. UPS’ stock is up 11% since 2000, compared to 209%, 174% and -13% on average for the rest of our transport sector, closest comparable FDX and the S&P 500, during that period. Year-to-date UPS is up 2% versus our transport sector, FDX and the S&P 500 up 7%, 9% and 2%.
Why has UPS’ stock underperformed its transport peers? We are not sure but suspect it is a combination of beginning in C99 with too rich a valuation (it has seen steady multiple contraction from near 30x to current 20x forward P/E), a lack of operating leverage during a strong economy, and an increasing sense that there is little value for UPS to unlock with its enormous FCF generation.
We sense mgmt is strongly considering using the BS. Management has recently publicly noted that UPS’ balance sheet is over capitalized and that it is not opposed to taking on greater leverage. We suspect they are increasingly frustrated with the stock performance, and we believe either a large strategic acquisition or a material share repurchase is increasingly likely.
Strategic acquisition seems most accretive. Below in this note we take a look at several scenarios from UPS levering up its balance sheet to 30%-50% debt to total cap. (2%-4% EPS accretive) by repurchasing stock to purchasing TNT to other large international forwarder acquisitions. Because of UPS’ massive size and share count none of these scenarios are massively accretive to earnings or returns.
Retain Peer Perform rating. We are more constructive on UPS’ stock than we have been over the past 12-15 months given our sense of stabilizing relative domestic pricing competitiveness. However, we continue to see cost headwinds during C06 for UPS and believe margins may be at or close to peak. Our analysis indicates a large shareholder event if it occurs is not likely game changing.
P:LibraryUPSUPS Potential_Buyback_Acqs 0306.pdf