Special Situation Investing

Tuesday, January 30, 2007

UPS (UPS) - Established a Long Term Holding

I continued purchasing for my taxable account today, picking up UPS (UPS) at $71.41 after less than impressive guidance knocked the stock back a touch. The company is only predicting earnings growth of 6-10% in fiscal 07 and this has some investors worried. Personally, I think management is just being cautious, and I think that's a good trait. I am buying this stock for the future so I could really care less what happens in 07 or 08 or even 09. So long as the company can perform in the long-run. I will also just mention that if UPS has a bad year, a LOT of other companies are going to have bad years.

My main rationale for buying the stock is similar to Western Union. I think the company has a dominant market position with margins to back it up. The sheer number of drop-off points, the massive logistics system and the brand name are not easily duplicated. On top of that management is buying back stock (~2.75% of outstanding shares last year), paying a dividend of ~2.1%, and staying focused on their core business. There is also a tradition at the company of grooming management from within, in my opinion that tends to accumulate value to the firm.

There is still plently of room for growth in the international market, consider that international revenue was $2.5 billion compared to $8 billion in the US alone. The company is also segwaying into providing supply chain solutions. The results have been less than spectacular to date but I have faith that management will turn it around or else cut it loose (spinoff?).

To summarize, I am buying quality with UPS and for a reasonable price. Not a special situation, not an amazing deal, but it has the potential to deliver. Barring economic ruin, with stock buybacks, dividends, earnings growth and an increase to the PE ratio, I have the potential to double my money over the next 4 to 6 years with reasonable downside. Even better, I can probably hold it for a lot longer than that if I continue to like what I'm seeing. For a taxable account, I think this is a good deal.


Post a Comment

<< Home