UPS Analyst Meeting

UPS Analyst Meeting – Little New Information, Except Weakened Near-Term Demand

MOSTLY INFORMATION MEETING. UPS hosted its 1st analysts’ meeting in 18 mths but provided little new info. We were surprised Mgmt. didn’t spend more time breaking down the benefits of the recently ratified Teamsters’ contract that will be implemented on Aug. 1 and that we believe is a clear improvement from the past 2 contracts.

DOMESTIC PACKAGE VOLUMES WEAKEN IN FEB. AND MARCH. Mgmt updated current operating expectations stating that domestic package vols, which were up +2% in Dec. and +3% in Jan. had taken a step back down to -2% the past 6 weeks. Dom. Pack. vols had been flat the first 11 months of C07 and have in aggregate remained flat for 14 mths but with a spike up and now back over the past 3 mths.

REDUCING OUR 1Q EPS AND MAINTAINING BELOW CONS 08 EPS. If vols don’t improve mgmt noted it will struggle to make the low end of prior 1Q guidance range of USD 0.94-USD 0.98. We have reduced our 1Q EPS estimate from USD 0.95 to USD 0.93 to reflect lower vol. expectation, while tweaking up our 2Q estimate a few cents to reflect lagging fuel surcharge gains. We have retained our low-end USD 4.35 08 EPS vs. Mgmt’s re-affirmed USD 4.30-USD 4.50 (and Cons. USD 4.43).

USPS PARTIAL DEREGULATION ON-TRACK FOR MAY. Separately, yesterday the US Postal Service announced that it will increase its competitive product prices between 1.5% and 9.5% on May 12, and begin to offer at this point still unknown pricing incentives to its larger customers. We believe it is too early to understand how the new partial postal deregulation will play out for package rates, but we don’t expect a C08 impact.

UPS REMAINS RATED OP. Our longer-term thesis remains unchanged, and we would use any near-term weakness in UPS related to continued weak vols as a near-term buying opportunity. UPS does not seem priced for perfection and the benefits from an improved new Teamsters contract and enhanced competitive position vis-à-vis FDX and DHL will likely play out gradually over the next several years.

INVESTMENT CONCLUSION: UPS closed yesterday down 1.2% vs. the S&P 500 down 0.9% and FDX down 1.3%, despite offering a 1Q EPS warning. It is currently trading at 16.2x and 8.8x our unchanged forward 12-month P/E and EV/EBITDA estimates, compared to its 1, 3, and 5 year averages of 16.4x, 18.1x, and 20.5x, and 8.9x, 9.4x, and 10.6x, respectively. We believe that over the long term UPS should trade at a market multiple roughly inline with the S&P 500, and likely above that in a period when its growth reaccelerates which we expect over the next several years. In addition, because of UPS’s international trade exposure, we believe it can continue to benefit from strong secular international trade volumes despite a slower economy (particularly domestic) and with its Teamsters contract locked down for another five years, the company stands poised to benefit from any potential labor woes at its competitor FDX’s Ground unit. UPS is one of our favorite names not only for its growth potential, but also for its defensive status, solid dividend, and limited downside risk. In addition, UPS is levering its solid balance sheet through USD 10B in share repurchases over the next two years, which should also help its EPS growth in a slower economy. Our unchanged USD 85 target price assumes our unchanged target forward P/E of 17x-18x out nine months from now on our then forward unchanged 2009 EPS estimate of USD 4.90. UPS remains rated Outperform. UPS Analyst Meeting – Little New Information, Except Weakened Near-Term Demand

MOSTLY INFORMATION MEETING. UPS hosted its 1st analysts’ meeting in 18 mths but provided little new info. We were surprised Mgmt. didn’t spend more time breaking down the benefits of the recently ratified Teamsters’ contract that will be implemented on Aug. 1 and that we believe is a clear improvement from the past 2 contracts.

DOMESTIC PACKAGE VOLUMES WEAKEN IN FEB. AND MARCH. Mgmt updated current operating expectations stating that domestic package vols, which were up +2% in Dec. and +3% in Jan. had taken a step back down to -2% the past 6 weeks. Dom. Pack. vols had been flat the first 11 months of C07 and have in aggregate remained flat for 14 mths but with a spike up and now back over the past 3 mths.

REDUCING OUR 1Q EPS AND MAINTAINING BELOW CONS 08 EPS. If vols don’t improve mgmt noted it will struggle to make the low end of prior 1Q guidance range of USD 0.94-USD 0.98. We have reduced our 1Q EPS estimate from USD 0.95 to USD 0.93 to reflect lower vol. expectation, while tweaking up our 2Q estimate a few cents to reflect lagging fuel surcharge gains. We have retained our low-end USD 4.35 08 EPS vs. Mgmt’s re-affirmed USD 4.30-USD 4.50 (and Cons. USD 4.43).

USPS PARTIAL DEREGULATION ON-TRACK FOR MAY. Separately, yesterday the US Postal Service announced that it will increase its competitive product prices between 1.5% and 9.5% on May 12, and begin to offer at this point still unknown pricing incentives to its larger customers. We believe it is too early to understand how the new partial postal deregulation will play out for package rates, but we don’t expect a C08 impact.

UPS REMAINS RATED OP. Our longer-term thesis remains unchanged, and we would use any near-term weakness in UPS related to continued weak vols as a near-term buying opportunity. UPS does not seem priced for perfection and the benefits from an improved new Teamsters contract and enhanced competitive position vis-à-vis FDX and DHL will likely play out gradually over the next several years.

INVESTMENT CONCLUSION: UPS closed yesterday down 1.2% vs. the S&P 500 down 0.9% and FDX down 1.3%, despite offering a 1Q EPS warning. It is currently trading at 16.2x and 8.8x our unchanged forward 12-month P/E and EV/EBITDA estimates, compared to its 1, 3, and 5 year averages of 16.4x, 18.1x, and 20.5x, and 8.9x, 9.4x, and 10.6x, respectively. We believe that over the long term UPS should trade at a market multiple roughly inline with the S&P 500, and likely above that in a period when its growth reaccelerates which we expect over the next several years. In addition, because of UPS’s international trade exposure, we believe it can continue to benefit from strong secular international trade volumes despite a slower economy (particularly domestic) and with its Teamsters contract locked down for another five years, the company stands poised to benefit from any potential labor woes at its competitor FDX’s Ground unit. UPS is one of our favorite names not only for its growth potential, but also for its defensive status, solid dividend, and limited downside risk. In addition, UPS is levering its solid balance sheet through USD 10B in share repurchases over the next two years, which should also help its EPS growth in a slower economy. Our unchanged USD 85 target price assumes our unchanged target forward P/E of 17x-18x out nine months from now on our then forward unchanged 2009 EPS estimate of USD 4.90. UPS remains rated Outperform.