New Year's Resolution #2: Analyze Some Good Companies

One company we all use regularly is United Parcel Service or UPS. Whether we're shipping products for our business, sending gifts, or doing a little online shopping, UPS is part of our lives. Is it a good company? Let's see what the sales/revenue was for the most recent period. Hmm: a little over $53 billion for the year. How much of that did they keep as a net profit? $3.8 billion. As you can see, package delivery/logistics is not a high-margin business, which is why it's intriguing that UPS has a net profit margin (the percentage of each dollar of sales the company  keeps) that is 35% higher than their rival, FedEx. Okay, but maybe they just had a good year--a lot of sports teams win the World Series and then disappear. Is that what's going on here? Actually, no. UPS has made profits over the last several years of $496 million, $655 million, $1.968 billion, $3.338 billion, and $3.8 billion. Notice a pattern there? Will that pattern continue? Nobody knows, but it is encouraging. This is not an industry subject to outsourcing or foreign competition--if you need a package delivered in Ottumwa, Iowa, no one in China can take it there for you, right? There are only a couple of players in this industry, and UPS has the biggest fleet, and makes the best profit margins.
Is there anything that would prevent you from owning a little piece of this company's profits? Only if you feel that package delivery will decline as an industry over the next 10 years, which seems unlikely to the point of absurd. As internet commerce becomes more and more acceptable, UPS will deliver more and more packages. It's really that simple. Or, if you feel the stock is trading at too rich a price, you should always hesitate to buy. In this case, UPS trades at 22 times the earnings-per-share. That is not cheap. Then again, we saw how the earnings/profits have grown steadily over the past five years--if they continue to grow at that rate, imagine how high the stock price could be at that point!
Or not. It's always a risk to buy a share of a public company. That's why you should never buy any stock without knowing what the company does, who it competes with, what the industry is like, and what the sales and profits look like. Doesn't take a finance degree to do that--just takes a little time, and a little gumption.Learn to Invest in Your Future