We are continuing our Buy on United Parcel Service, Inc. (UPS), as the stock is undervalued, but cutting our target price to $75. UPS reported second quarter EPS of $0.85, in line with earnings guidance provided on June 23. We are decreasing our EPS estimates for 2008 to $3.60 from $4.05, the midpoint of the company's revised EPS guidance of $3.50 to $3.70, reduced from $3.90 to $4.20, and to $4.15 from $4.65 for 2009.
While the weaker U.S. economy, slowing US volume growth, the shift away from premium products, increased fuel costs and higher interest expenses related to a $6.1-billion pension payment will be earnings drags, rate hikes, expansion into China, recent acquisitions, and share repurchases should propel EPS growth. In January, UPS instituted a two-year, $10-billion share repurchase plan and announced a 7% increase in the dividend.
United Parcel is also expanding its base in China and it intends to invest $100 million in a joint venture with the Sinotrans Group, one of China's largest parcel operations. As a result, UPS will become the first foreign company to have a wholly owned operation in the express parcel business in China. We view this as a significant investment positive, as it provides access to 330 cities, which account for nearly 85% of China's gross domestic product.
At its current price, UPS is trading at substantial premiums to the peer group based on price/sales and price/book value. Superior operating efficiency, balance sheet strength and ROE justify a premium valuation to the peer group. Therefore, we expect valuation to expand from currents levels.
Read the full analyst report on UPS
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