| BUSINESSWEEK ONLINE : OCTOBER 25, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR -- THE BARKER PORTFOLIO
What's Big, Brown, and Beautiful? UPS You know it, and even slow learners like me know it: Initial public offerings are suckers' bets. Yes, some IPOs prove to be monster hits, Yahoo!s that scream their way to see-ya-later-boss-I'm-retiring gains. But most end up enriching insiders and bankers--at our expense. So why am I about to say lots of nice things about the upcoming IPO of United Parcel Service? Because it sticks out every bit as much as do all those guys in brown uniforms, brown trucks, and brown-tailed jets. In an era full of IPOs for companies with thin revenues, fat losses, and imperceptible net worths, the world's largest package deliverer is a monumental thing of beauty. UPS's revenues make it bigger than Johnson & Johnson, its earnings make it more profitable than Boeing, its shareholder equity more valuable than Alcoa or Nokia. Most of that equity since 1927 has been the property of UPS employees, managers, and retirees. Now they're preparing for an Oct. 25 vote on a reorganization plan. If approved, 10%, or 110 million shares, of UPS would be sold in an early November deal led by Morgan Stanley Dean Witter. Price? It isn't set yet, but the total to be raised threatens to topple Conoco, which a year ago drew $4.4 billion in the richest IPO ever. Once the deal's done, UPS plans to use the dough to buy back from its employee-owners an equivalent number of the shares sold to the public. The moves are aimed at keeping the insiders' equity intact while equipping management with a new tool--the ''currency'' of liquid stock--to help it expand globally. That's terrific if you dress in brown every day. If you don't, the question is: At what price should UPS interest you? To answer that, I started looking into FDX, parent of UPS archrival Federal Express and the most comparable publicly held stock. Both companies are growing beyond their basic U.S. operations into foreign markets, the delivery of e-commerce orders, and ''third-party logistics''--that is, managing other companies' supply chains and inventories. How much have investors been willing to pay for FDX, itself a classy act? On faith that it would clean up in the e-commerce boom, FDX stock nearly tripled from last fall to May, when it hit $61.88. UPS Chief Executive James Kelly isn't talking, but I can't help imagining that the swift ascent in FDX shares encouraged him in July, when UPS unveiled its plan to go public. At its peak, FDX commanded a market value of $18 billion, or 29 times the prior 12 months' profit. A lot of air has since gone out of that balloon, though. FDX disclosed in September that higher fuel prices are denting profits, and the shares lately have traded around $42, just 20 times earnings. CASH ON HAND. Should that multiple apply to UPS? No way--it deserves more. As good as FDX may be, by most measures UPS is superior (table). By revenues, it's half again as big. Its operating profit margin is twice as wide. It's growing more swiftly, it can't recall its last annual loss, and it's a financial fortress: While long-term debt at FDX is more than four times its cash on hand, UPS boasts cash enough to pay off its entire debt and still have more than $1 billion left over. UPS is due soon to report its quarterly results, but because it hedges against higher oil prices more fully than FDX, it's unlikely to suffer as much--foresight that spells one more reason why UPS deserves a premium. Just how bold UPS and its bankers will be when they price the IPO, I can't say. Anyway, few shares will be available for small investors initially. But once the stock is trading, here's how you can size it up: At FDX's current multiple of 20 times the past 12 months' earnings, you'd pay about $37 a share for UPS. At a premium, say 23 times earnings, you'd pay $42. At 25 times, the price would be $46 a share enough to give UPS a total market value of more than $50 billion. As it happens, that's nearly the value investors have recently awarded Yahoo!, which nets about two pennies for every dollar earned by UPS. Could a bunch of dependable guys in brown really be worth as much as Yahoo!? Let's just say they're not offering a sucker's bet. Questions? Comments? E-mail barkerportfolio@businessweek.com or fax (407) 728-1711 By ROBERT BARKER _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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