The Motley Fool Previous Page


Is UPS Destined for Greatness?

http://www.fool.com/investing/general/2013/02/19/is-ups-destined-for-greatness.aspx

Alex Planes
February 19, 2013

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what United Parcel Service's (NYSE: UPS) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell UPS's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much UPS's free cash flow has grown in comparison with its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If UPS's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is UPS managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that UPS's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at UPS's key statistics:

UPS Total Return Price Chart

UPS Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

19.5%

Fail

Improving profit margin

(359.1%)

Fail

Free cash flow growth > Net income growth

(100%) vs. (59%)

Fail

Improving EPS

(59.2%)

Fail

Stock growth (+ 15%) < EPS growth

59.1% vs. (59.2%)

Fail

Source: YCharts.
*Period begins at end of Q4 2009.

UPS Return on Equity Chart

UPS Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

54.7%

Pass

Declining debt to equity

59.3%

Fail

Dividend growth > 25%

21.3%

Fail

Free cash flow payout ratio < 50% 

43.5%

Pass

Source: YCharts.
*Period begins at end of Q4 2009.

How we got here and where we're going
UPS doesn't do much to impress today, with a measly two out of nine possible passing grades. Still, many of our Foolish analysts remain at least somewhat optimistic. Let's look at why this poor performance might not be indicative of UPS's potential, and how it might recover from what seems to be a momentary weakness.

UPS's big drop in its latest quarter was the result of