Stock of the Week
Stock Symbol: UPS
Price as of 6/3: $94.13
After a good start to the year, Sell in May and go away is certainly working. The S&P 500 lost over 6% in the month of May while the Dow dropped 3% the last week of May and notched its sixth straight weekly loss. It's the Dow's longest weekly losing streak since 2011. Most of the blame for the sell off in May was due to no trade deal with China. In fact, the trade tensions are getting worse and now President Trump has added Mexico to the tariff list. It's certainly been difficult to pick stocks in the Trump administration, but with the current market sell off, valuations are getting better and picking stocks is getting easier.
Back in March we highlighted FedEx (FDX) in the transportation space. The stock initially performed well, but has since succumbed to more profit-taking, trading near its 52-week low. FedEx remains an attractive stock trading for 10 times earnings and 0.5 times sales. This week we will highlight their competitor, UPS (UPS). UPS is in 220 countries and delivers 21 million packages a day, making it the industry leader. Similar to FedEx, UPS trades near its 52-week low with a low valuation, but a great dividend yield of 4%.
In the short term, FedEx and UPS are experiencing slower growth with concerns of a slowing global economy. But UPS continues to generate strong cash flow which should improve going forward. Over the last three years, UPS has invested heavily to automate its distribution facilities. Capital outlays have more than doubled in the last several years to $7 billion as stock buybacks have slowed. Going forward, UPS will reduce their capital spending boosting free cash flow from a current $3 to $4 billion to $6 billion or more starting in 2021. The company is also expecting the capital expenditures over the last several years to dramatically boost earnings in the coming years.
In the short term, UPS and the transportation stocks may remain under pressure, but long term the prospects for UPS remain bright. The company continues to target 4% to 6% growth while also favoring dividend hikes over share buybacks. UPS already hiked their dividend 5% this year, and with better cash flow going forward, UPS will be able to continue their dividend hikes.
Analysts have price targets of $116 to as high as $130 a share for UPS. While investors wait for the fundamentals and cash flow to improve, income investors may like the 4% dividend coming in very year.
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