Has UPS Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if United Parcel Service (NYS: UPS) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at UPS.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.3%||Fail|
|1-Year Revenue Growth > 12%||8.3%||Fail|
|Margins||Gross Margin > 35%||23.7%||Fail|
|Net Margin > 15%||7.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||146.1%||Fail|
|Current Ratio > 1.3||1.70||Pass|
|Opportunities||Return on Equity > 15%||49.9%||Pass|
|Valuation||Normalized P/E < 20||18.42||Pass|
|Dividends||Current Yield > 2%||3.1%||Pass|
|5-Year Dividend Growth > 10%||6.9%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
When we looked at UPS last year, it only managed to score three points. Along with better revenue growth, the company's valuation has gotten more attractive, giving the delivery company an extra point.
UPS has a well-deserved reputation as a leading indicator of the status of the global economy. Lately, UPS has stayed on target, overcoming obstacles ranging from unrest in the Middle East to natural disasters in Japan and the U.S. to reaffirm long-term guidance on sales and profit growth through 2016.
Still, the fly in the ointment for transportation stocks in general is the cost of fuel. Although energy prices have fallen somewhat in recent months, UPS still faces the same long-term trends as fellow transporters Expeditors International of Washington (NAS: EXPD) and J.B. Hunt Transport (NAS: JBHT) .
Moreover, as fellow Fool Sean Williams points out, rival FedEx (NYS: FDX) beats out UPS on a variety of measures. With a cheaper earnings multiple and price-to-book ratio, as well as faster revenue growth over the past decade, FedEx seems like a better value than UPS.
Two questions will determine the path of UPS's future. If fuel costs remain high, then UPS may gain a competitive advantage from its use of intermodal shipments -- a revenue source that has become increasingly important for railroad companiesCSX (NYS: CSX) and Norfolk Southern (NYS: NSC) -- because FedEx has been slow to adopt railroad use. On the other hand, if fuel costs drop, the rules of the entire industry will change again. Either way, UPS has a huge workforce and plenty of financial resources to make the most of its opportunities.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
Click hereto add UPS to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of FedEx and United Parcel Service. Motley Fool newsletter services have recommended buying shares of FedEx. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.