Today's 11 O'Clock Stock: UPS

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Around the office, I'm known as a guy who likes wide moats priced at no-moat prices. Unfortunately, undervalued blue chips don't exactly rain from the heavens. Occasionally, though, they show up in boxes. Enter the world's largest package delivery company, United Parcel Service (NYSE: UPS  ) . And while UPS ships more than 15 million packages a day to customers across 200 countries and territories, today's lone special package has your name all over it.

Fast facts on UPS

Market Capitalization

$67.6 billion

Industry

Shipping

Revenue (TTM)

$47.5 billion

Earnings (TTM)

$2.7 billion

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

Break out the white board
Let's play a game. Describe to me a perfect anchor stock in your portfolio. You're obviously in the market for a durable competitive advantage, right? UPS offers that in spades, operating alongside rival FedEx (NYSE: FDX  ) as one of the select few global shippers capable of getting a package from Point A to Point B quickly, cheaply, and profitably. Barriers to entry in the shipping business are massive and will only continue to heighten as these aspiring duopolists grow their massive networks and scale advantages over time.

You're probably looking for a solid dividend. I assume a 2.8%-yielding payout that has grown at nearly 9% annually over the past half-decade will do, yes? Good.

Stability? UPS' shares are less volatile than the broader market thanks to a conservative balance sheet and the couple billion it pulls in annually in free cash flow.

Growth? Absolutely. UPS should be able to grow its top line thanks to the rising tide of global trade in the years ahead. Not only that, but the company should be able to quietly muscle through progressively higher price increases as barriers to entry in the shipping industry rise.

Insider ownership? I think you're getting a little greedy on that one considering we're talking about blue chips, but UPS still features an enviable owner-operator culture as a legacy of its 1999 IPO. I love when customer-facing employees are stockholders, which is frequently the case at UPS.

What Brown can do for you
I think UPS' shares are worth about $71 a share, making for a few bucks worth of upside at recent prices. No, that's not flashy, but the prospects of a post-recessionary bounce and a growing 2.8%-yielding payout ought to tug at the heartstrings of just about any conservative long-term investor.

There are risks, of course, with a key obvious one being a double-dip recession that could seriously dent UPS' profits. Another key risk is UPS' susceptibility to high oil prices thanks to its fuel-guzzling fleets of trucks and planes. That risk can be nicely hedged against, though, with a complementary position in a fellow undervalued blue chip: ExxonMobil (NYSE: XOM  ) . Exxon and UPS are far from negatively correlated, but one stock's loss should show up as the other's relative gain as oil zigs and zags.

The Foolish bottom line
UPS is a conservative business built to last for the very long haul. Its massive network makes for huge barriers to entry and sturdy profits that should easily trend upward over time. Tack on some upside with a 2.8% yield, and you're looking at a strong, rest-easy long-term winner. That is what Brown can do for you.

Come back to Fool.com Monday for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well! To see the performance of previous recommendations, click here.

The Motley Fool will wait at least 24 hours after this publication before buying shares of UPS. To see an FAQ on "11 O'Clock Stock," click here.

Joe Magyer is the advisor of Motley Fool Inside Value. Joe owns shares of ExxonMobil but has no financial interest in any other companies mentioned in this article. FedEx is a Motley Fool Stock Advisor selection. United Parcel Service is a Motley Fool Income Investor choice. The Fool owns shares of ExxonMobil and FedEx. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 03, 2010, at 11:15 PM, AG1476 wrote:

    UPS is NOT a shipping company. Shippers tender freight to those who transport it. If Amazon sends me a book via UPS then Amazon is the shipper and UPS is the transportation firm. UPS is a transportation firm and NOT a shipping firm. This misdescription, regrettably, is spreading.

    George Smith

  • Report this Comment On September 07, 2010, at 12:19 AM, foolasia wrote:

    I agree that UPS makes for a good stock buy. In David's pick of FedEx, I also made the case that UPS was the better choice.

    UPS is the top ranked industry leader by a very wide margin and wider moat. With a market cap more than double Fedex's, the company also consistently generates ROE that is almost double what Fedex achieves.

    FedEx greatly benefits from the fact that its workers are currently non-union, not including the pilots. Given the strong push by its competitor, teamsters and workers for unionization at Fedex, the company will lose its narrow competitive advantage once they are ultimately forced to adjust to this new reality and accept unionization. Meanwhile, UPS has already had much experience with unionized workers giving them an edge over FedEx.

    This is a cyclical business and either pick represents a bet that there will be a boom in ecommerce and trade and that they will profit from it. Given the choice of either FedEx or UPS, UPS is the clear winner.

    Foolasia

  • Report this Comment On September 10, 2010, at 5:48 PM, smerfdoobrie wrote:

    Barriers to entry in the shipping industry are massive!!

    No they're not-ask any Greek ship owner-a four year old with twenty dollars in the bank can cherry pick a profitable line and leave the others the costly small drops

  • Report this Comment On September 11, 2010, at 8:56 AM, prime22 wrote:

    UPS was just removed from the FTSE4Good list for,among other things, human rights violations. Since socially responsible investors, pension, mutual funds and others use this screening tool, what can you tell me about the implications?

  • Report this Comment On September 11, 2010, at 8:21 PM, UFOFred wrote:

    In addition to the human rights issues mentioned by prime22, I am concerned that UPS has class A shares with 10 votes each (27%) and class B (73%) with only one vote. Apparently management does not believe in democracy.

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