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 (NYSE: 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.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

2.2%

Fail

 

1-Year Revenue Growth > 12%

4.7%

Fail

Margins

Gross Margin > 35%

22.9%

Fail

 

Net Margin > 15%

7.2%

Fail

Balance Sheet

Debt to Equity < 50%

170%

Fail

 

Current Ratio > 1.3

1.75

Pass

Opportunities

Return on Equity > 15%

48.4%

Pass

Valuation

Normalized P/E < 20

19.54

Pass

Dividends

Current Yield > 2%

3.1%

Pass

 

5-Year Dividend Growth > 10%

6.4%

Fail

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at UPS last year, the company hasn't been able to improve any further than it did  between 2010 and 2011. The stock also hasn't done much, gaining less than 10% over the past year.

UPS has done an excellent job of providing worldwide service while still maintaining pretty healthy profits. The company's pending purchase of European delivery company TNT Express, if approved, will give UPS broader reach in Europe as well as in emerging markets like China and Brazil. Profit margins at UPS beat out those of rival FedEx (NYSE: FDX  ) by a significant amount.

But the slowing economy has had a big impact throughout the shipping industry. Just as businesses offering slower transportation options like dry-bulk shipper DryShips (Nasdaq: DRYS  ) and tanker company Frontline (NYSE: FRO  ) have suffered from a lack of demand, UPS recently lowered its full-year 2012 forecast and warned that third-quarter earnings would fall below last year's levels. FedEx has had to make cuts as well.

The real opportunity for UPS lies in e-commerce. With Amazon.com (Nasdaq: AMZN  ) enticing its rivals to offer similar shipping deals, UPS stands to reap the benefits. And with a larger fleet than FedEx, UPS could get more than its fair share of the resulting profits if it plays its cards right.

For UPS to improve, it needs to work on getting its debt load down. With a vastly superior dividend to FedEx, though, UPS offers investors a healthy income along with exposure to the broader global economy.

Keep searching
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 out the best investments from the rest.

Amazon has become an important key to UPS's success lately, but it has its fingers in a lot more pies than just delivering stuff people buy from its website. We'll tell you what's driving Amazon's growth, and how to know when to buy and sell Amazon's stock in our new premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as their story changes, so click here now to read more.

Click here to add UPS to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, FedEx, and UPS. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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