Should I Buy UPS? 3 Pros, 3 Cons

It's tough for a global company to grow when global growth is slow

   
Should I Buy UPS? 3 Pros, 3 Cons

Yesterday, United Parcel Service (NYSE:UPS) posted a lackluster second-quarter report. Earnings were up only 2.2% to $1.15 a share, and revenues rose by 1.2% to $13.35 billion. The Wall Street consensus was for a profit of $1.17 a share and revenues of $13.7 billion. On news of the report, the stock fell by nearly 5%.

While the North American business continues to be robust, continuing problems are slowing UPS in foreign markets, such as Europe. And there’s little clarity on when things will improve.

But does the recent drop point to an opportunity to get a bargain on UPS? Or should investors still wait? To see, here’s a look at the pros and cons:

Pros

Massive Barriers to Entry. It would be nearly impossible to replicate UPS’s footprint. In fact, it operates the only network that provides all key services like express, domestic, ground, international, commercial and residential. For 2011, the company delivered 4 billion packages across 200 countries and territories.

UPS has also expanded into supply-chain services. These include freight forwarding, customs brokerage, fulfillment and returns.

Secular Trends. UPS will continue to benefit from the growth in trade across borders, especially as emerging markets continue to modernize. Over the decades, the company has invested heavily in infrastructure and technologies to provide standout service options. For example, UPS has two main air hubs in Shanghai and Shenzhen, which allow for faster intra-Asia transit times.

E-commerce is another important driver, which continues to grow at a hefty rate as seen with companies like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY).

Cash Cow. During the past six months, UPS generated $3 billion in free cash flow. This was up by $600 million over the past year.

For 2012, UPS plans to spend $1.5 billion on share repurchases. The dividend yield is also at an attractive 2.9%.

Cons

Global Economy. Unfortunately, the world has been slowing down recently. It’s not just Europe but also Asia. Even the mighty China is seeing a deceleration. While UPS has cost advantages, it will be tough to maintain a strong growth rate if the global economy continues to deteriorate.

Competition. There are several mega players like FedEx (NYSE:FDX). But across the globe, UPS must also contend with many local and regional operators.

Regulations. They are onerous and cover areas like environmental laws, security requirements and safety standards. And because UPS is a global operation, the costs are substantial and will probably grow as other countries continue to modernize.

Verdict

So far, UPS has continued to deal adequately with the macroeconomic headwinds. But there are limits. If the global economy continues to weaken, it will become a major problem.

On the conference call, the company said something worth noting. Historically, global exports have grown at a higher rate than GDP. But this isn’t the case now, which is certainly ominous for UPS. The last time this happened was during the Great Recession.

So, at least for the short run, it looks like UPS will continue to feel pressure on growth. In light of this, the cons outweigh the pros on the stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO.  Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/07/should-i-buy-ups-3-pros-3-cons/.

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