Saturday, October 1, 2011

Research: UPS as a viable company

UPS financials looks decent on the surface, but I would definitely have to spend a lot of time looking at the 10K. With a shareholder equity of about 8bn and total liabilities of about 26bn, this is a highly leveraged operation. I am unhappy about its 11bn in total debt and its inconsistent and small operating cash flow of 3.8bn for last year. The large amount in total liabilities suggests that UPS has many operating leases which are not classified as debt, which can potentially mislead investors of exactly how leveraged UPS is.

I REALLY don't like the 6bn unusual expense that it took in 2007. Often, large unusual expenses are a way to create reserves and pull future expenses into today's accounting period. By prepaying expenses, future accounting periods can look more profitable since normal expenses have already been paid for. I would have to check historical 10K's to see what exactly this expense was used for. Although a large portion of the expense may be legitimate, it's easy to abuse the one time expense for something more malicious.

UPS appears to be a viable company, meaning it is actually profitable and I wouldn't expect it to be in any trouble tomorrow. However, I don't look to get into companies simply because they are viable. I want companies that outperform the market. Given the things I found above already, I do not have significant reason to believe that UPS will outperform SPDRs in the long run. I am making this conclusion before going into the 10K, and I expect to find more gloomier things if I dig (operating leases which should be classified as debt, for example).

If UPS comes down to around a price of $30, which is a PE ratio of around 7.5, I would love to take another look. At a PE of 15, I feel the risk is too high and the price is too expensive for a company with marginal financials.

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