It’s not Manny Pacquiao versus Keith Thurman, but there is a Wall Street analyst fight on the future of United Parcel Service, Inc. NYSE: UPS. This looks like it could be a one-sided affair, just like Pacquiao v. Thurman.
Introducing to you, in the bullish corner… Merrill Lynch’s Ken Hoexter, who upped his view of the shipping company to a BUY recommendation from a Neutral rating with a price-tag of $130. He’s big on the e-commerce revolution, boosting the airfreight delivering industry. Hoexter pointed to a 7% increase in US deliveries versus his expectation of 4% with Next Day Air growing 30% compared to his mark of 13%.
And in this corner, wearing the bearish view, a Morgan Stanley analyst says he is “more convicted” in his sour opinion on UPS. Ravi Shanker believes UPS would be hit if Amazon insourced its air delivery. Despite the spike in UPS business adding to the bullish case, he feels it will be hard for the company to live up to its full-year guidance.
They can’t both be right. Let’s look at UPS’s valuations and see whose arm will be raised as the winner.
For 2020, the street has a consensus view of $8.09 in earning-per-share (EPS) with a range of $7.35 to $8.45. That’s year-over-year EPS growth of 8.30%, below the five-year average of 9.12%. During the last half-decade, investors have been willing to pay an average of 18.77 times the delivery company’s bottom line.
Wall Street has been willing to pay a 106% premium to UPS’s earnings growth rate. The calculator says 8.30% projected earnings growth times a 106% markup equals a price-to-earnings ratio of 17.10. Next step, $8.09 at a multiple of 17.10 works out to be $138.34. Of course, UPS could fail to live up to the Street’s outlook; however, management has missed the quarterly consensus target just three times since July 2014.
P/E Scorecard: There wasn’t a knockdown, but bulls take the round – Ken Hoexter- 10, Ravi Shanker- 9. (For those who don’t follow boxing, judges assign 10 points to the winner of the round and 9 to the loser. For every knockdown, they deduct a point for the one getting knocked down. Seven is typically as low as they will go.)
Our next metric in this valuation fight is price-to-sales (P/S). As of this writing, “what can Brown do for you” trades at 1.40 times sales, slightly lower than its five-year average of 1.50. The smart guys/girls in starched white shirts predict sales of $78.1 billion, with a minimum of $76.1 billion and a maximum of $80.25 billion.
Since investors are currently willing to pay 1.4 times revenue, we’ll start there. Using the consensus top line target of $78.1 billion times 1.4 delivers a price target of $156.75. The half-decade average P/S ratio of 1.5 is even richer at $167.95.
Now, UPS has fallen short on revenue forecasts more frequently than earnings misses. Management has failed to deliver in eight quarters in the last five years. At the bottom of 2020’s range, $76.1 billion, the current price-to-sales ratio of 1.40 translates into $152.79 and $163.65 at 1.50 times revenue.
P/S Scorecard: There was a knockdown in round two – Ken Hoexter- 10, Ravi Shanker- 8.
In the short-term, UPS’ stock price has launched into overbought territory on a daily basis with a Relative Strength (RSI) reading of 77. Normally, a score above 70 attracts sellers and profit taking. However, RSI on a weekly basis has some remaining headroom, maybe $120ish.
We wouldn’t be too surprised to see the industrial company’s price consolidate between $110 and $120 in the near-term. However, in the next 18-months or so, UPS’s historical price-to-earnings and price-to-sales ratios suggest the stock price could trade from $138.34 to $152.79.
And we go to the judge’s scorecards. After two rounds of valuation fighting, we have a unanimous decision. All judges score the fight 20 for Merrill Lynch’s Ken Hoexter and 17 for Morgan Stanley’s Ravi Shanker.