Title: Green
1Green Gold Fund
- Recommendation BUY United Parcel Service (UPS)
Sell NG, JOYG, BHP
2Industry Overview
- Industry demand drivers
- E-commerce
- Emerging economies
- Trade
3Company Profile
UPS is the world's largest express carrier,
specializing in time-definite package delivery
and a growing presence in specialized
transportation and logistics services. UPS
delivers packages for more than 1.1 million
shipping customers to 7.4 million consignees each
day in over 220 countries and territories, using
a network of 99,800 delivery vehicles, 527
planes, and 400,600 employees as of December 31,
2010. In 2010, UPS delivered 15.6 million pieces
per day and recorded 49.5 billion in revenue.
4Investment Information
5UPS v. FDX
- In Search of Superior risk-adjusted returns
- UPS Outguns FDX
- Lower volatility (beta)
- Higher yield
- Stronger profitability
6UPS v. FDX
UPS FDX
Total Returns 24 42
Standard Deviation 7.53 17.55
Risk-adjusted returns 3.20 2.37
- Notes
- Returns since January 1, 2003
- Adjusted for dividends
- Risk adjusted returns (TotalReturns100)/standa
rd deviation - Past performance does not guarantee future results
7Chart Buy the Dip
8Chart Oversold and Bottoming
9Key Investment Points
1 Pricing power domestic duopoly,
international oligopoly 2 E-commerce tailwind
for long-term growth 3 Return of capital to
shareholders
101 Pricing Power
- DHL competition
- Oil price spike
- Recession / avg weight down
111 Pricing Power
121 Pricing Power
- 4 competitors UPS, FDX, DHL, USPS
- DHL Low cost provider exited domestic express
land/air market in 2009 - DHL continues to offer international and heavy
weight shipping - USPS considering more limited services
- UPS and FDX now have greater pricing power
-
131 Pricing Power
142 E-commerce US
152 E-commerce US
162 E-commerce China
173 Return of Capital
Reduced share count by gt2 per year since 2005
183 Return of Capital
Dividend CAGR 10 for the last decade
19SWOT Analysis
Strengths Strong competitive position duopoly International growth, esp. Asia Scale / profitability Strong cash flow, financial flexibility Weaknesses Capital intense Unionized labor force (agreement runs through July 2013)
Opportunities USPS cutbacks Price increases Increase buy backs, dividends New distribution partnerships Threats Labor strike Oil prices Recession Price war with FedEx, USPS Mkt decline / pension funding
20Valuation
Dividend Discount Model
Beta 0.89
Rf 2.33
MRP 8
Required Return 9.5
5-yr Dividend Growth Rate 7.30
Dividend 2.08
Fair Value 96.74
DCF Model
Terminal growth rate 2.50
Terminal FCF 3,986
/(r-g) 83,562
Discount factor 1.45
PV TV 57,480
PV of FCF 12,867
Enterprise Value 70,347
less debt 12,170
add cash 5,640
Equity Value 63,817
/ Shares 981
Fair Value 65.07
P/E Price Target
2012E EPS 5.16
1-yr average forward P/E 17.0x
Price Target 87.72
Note UPS' FCF potential is likely understated as
margins have fallen.
21Valuation
22Valuation Which Method?
- Given the companys record of consistent dividend
increases, DDM appears most appropriate - However, each valuation method in sensitive to
the assumptions used to derive the inputs - An average of the methods yields a more
conservative 12-month price target.
Valuation Summary
Dividend Discount Model 96.74
P/E Price Target 87.72
DCF Model 65.07
Average 83.18
Current Price 64.70
Upside 29
23Portfolio Recommendation
- BUY 150 shares of UPS at a limit price of 64
(9,600, 2.1 of portfolio) - Sell 100 JOYG _at_ Market (83.45, 8,345)
- Sell 125 BHP _at_ Market (85.17, 10,646)
- Sell 400 NG _at_ Market (10.30, 4,121)
24Portfolio Recommendation
- Industrials
- Target Sector Allocation 7.3,
- Current Sector Allocation 3.3
- Allocation after sale 1.6
- Allocation after purchase 3.7
25Portfolio Recommendation
- Materials
- Target Sector Allocation 2.4,
- Current Sector Allocation 5.4
- Allocation after sales 2.2
26Sell Rationale
- Materials
- BHP Levered to China, fairly valued in an
uncertain market sell - JOYG Similar to BHP. Repurchase if the stock
falls to 55 or below. Expect the stock to fall
no further than the upper 40s. I would highly
recommend a repurchase. - NG Will need to raise funds by issuing stock. We
can repurchase after the secondary if we so
desire.