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UPS Represents A Consistent Secular EPS Growth Opportunity

Manikandan Raman

Aegis Capital believes United Parcel Service, Inc. (NYSE: UPS) could grow secular EPS on a consistent basis, along with meaningful shareholder returns, despite investments over the next couple years that could weigh on margins and cash flow.

“While longer term, we look for 5-6 percent revenue growth to drive a consistent 10-14 percent total return profile CAGR for investors," Aegis analyst Jeffrey Kauffman said in his report. "For the next 2-3 years, this will look more like 4-6 percent revenue growth driving 5-10 EPS growth and 8-13 percnet total returns."

The comments came after UPS’ investor day, where the company announced its three-year outlook, as well as accelerated capital projects that are intended to cut unit costs in the domestic network and increase operating flexibility.

UPS announced the rollout of Saturday pickup and delivery, and said it's embracing newer technologies such as autonomous vehicles and drone delivery services.

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The company said its investments would bring near-term profit and cash flow to the tune of $100-200 million in annual operating profit, and draw down cash flow by $1-1.5 billion. That said, UPS believes when the investments are finished, they'll create about $800 million to $1 billion in annual cost savings for the company.

“Operating cash flows averaging $8-$10 billion, even after capital spending in the $4 billion range, should still result in free cash flows of $4-6 billion, which can still support our $120 valuation, even in a higher-than-average investment phase,” Kauffman said.

Kaufman has a Buy rating on UPS shares, which, at last check, fell 2.20 percent to $105.36.

Latest Ratings for UPS

Date Firm Action From To
Feb 2017 Bank of America Downgrades Buy Neutral
Feb 2017 Aegis Capital Upgrades Hold Buy
Feb 2017 BMO Capital Downgrades Outperform Market Perform

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