UPS a Buy at Current Levels

We are retaining our Buy on United Parcel Service, Inc. (UPS), as the stock continues undervalued, as well as our $75 target price. UPS will report third quarter results on October 23. We are maintaining our EPS estimates for 2008 at $3.60, the midpoint of company EPS guidance of $3.50-3.70 and at $4.15 for 2009.

UPS reported second quarter diluted EPS of $0.85, in line with earnings guidance provided on June 23. While the weaker U.S. economy, slowing U.S. volume growth, the shift away from premium products, increased fuel costs and higher interest expense related to a $6.1 billion pension payment will be earnings drags, rate hikes, expansion into China, recent acquisitions and share repurchases should propel EPS growth. In January, UPS instituted a two-year, $10 billion share repurchase plan and announced a 7% increase in the dividend.

At its current price, UPS is trading at a 13% premium to the industry median P/E (versus a 0% premium at the time of our last report on July 22, 2008), based on 2009 consensus estimated earnings. It is trading at substantial premiums to the group based on price/sales and price/book value.

While UPS’s projected five-year earnings growth rate matches the median of its peer group, its operating margin, dividend yield and return on equity (ROE) are significantly higher than all of its peers. Superior operating efficiency, balance sheet strength, and ROE justify a premium valuation to the peer group. Therefore, we expect valuation to expand from currents levels. Our price target is $75, based on roughly 17 ¼X our 2009 EPS estimate of $4.15, representing a 21% premium to the peer group.

Read the full analyst report on UPS

Read the full analyst report on UPS