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Green & Gold Fund

Recommendation: BUY United Parcel Service (UPS); Sell NG, JOYG, BHP. Green & Gold Fund. Industry Overview. Industry demand drivers: E-commerce Emerging economies Trade. Company Profile.

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Green & Gold Fund

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  1. Recommendation: BUY United Parcel Service (UPS); Sell NG, JOYG, BHP Green & Gold Fund

  2. Industry Overview • Industrydemand drivers: • E-commerce • Emerging economies • Trade

  3. Company 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.

  4. Investment Information

  5. UPS v. FDX • In Search of Superior risk-adjusted returns • UPS Outguns FDX: • Lower volatility (beta) • Higher yield • Stronger profitability

  6. UPS v. FDX • Notes: • Returns since January 1, 2003 • Adjusted for dividends • Risk adjusted returns = (TotalReturns%*100)/standard deviation • Past performance does not guarantee future results

  7. Chart: Buy the Dip

  8. Chart: Oversold and Bottoming

  9. Key Investment Points #1: Pricing power – domestic duopoly, international oligopoly #2: E-commerce tailwind for long-term growth #3: Return of capital to shareholders

  10. #1: Pricing Power DHL competition Oil price spike Recession / avg weight down

  11. #1: Pricing Power

  12. #1: 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

  13. #1: Pricing Power

  14. #2: E-commerce: US

  15. #2: E-commerce: US

  16. #2: E-commerce: China

  17. #3: Return of Capital • Reduced share count by >2% per year since 2005

  18. #3: Return of Capital • Dividend CAGR 10% for the last decade

  19. SWOT Analysis

  20. Valuation Note: UPS' FCF potential is likely understated as margins have fallen.

  21. Valuation

  22. Valuation: Which Method? • Given the company’s 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.

  23. Portfolio Recommendation • BUY 150 shares of UPS at a limit price of $64 ($9,600, 2.1% of portfolio) • Sell 100 JOYG @ Market (~$83.45, $8,345) • Sell 125 BHP @ Market (~$85.17, $10,646) • Sell 400 NG @ Market (~$10.30, $4,121)

  24. Portfolio Recommendation Industrials • Target Sector Allocation: 7.3%, • Current Sector Allocation: 3.3% • Allocation after sale: 1.6% • Allocation after purchase: 3.7%

  25. Portfolio Recommendation Materials • Target Sector Allocation: 2.4%, • Current Sector Allocation: 5.4% • Allocation after sales: 2.2%

  26. Sell 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.

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