Stock Analysis on Net
Stock Analysis on Net

United Parcel Service Inc. (NYSE:UPS)

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

United Parcel Service Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 12.38%
01 FCFF0 5,768
1 FCFF1 5,866 = 5,768 × (1 + 1.70%) 5,220
2 FCFF2 6,061 = 5,866 × (1 + 3.31%) 4,799
3 FCFF3 6,359 = 6,061 × (1 + 4.93%) 4,481
4 FCFF4 6,776 = 6,359 × (1 + 6.55%) 4,248
5 FCFF5 7,329 = 6,776 × (1 + 8.16%) 4,089
5 Terminal value (TV5) 187,974 = 7,329 × (1 + 8.16%) ÷ (12.38% – 8.16%) 104,868
Intrinsic value of United Parcel Service Inc. capital 127,704
Less: Long-term debt, including current maturities (fair value) 22,100
Intrinsic value of United Parcel Service Inc. common stock 105,604
 
Intrinsic value of United Parcel Service Inc. common stock (per share) $123.85
Current share price $147.59

Based on: 10-K (reporting date: 2023-12-31).

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Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

United Parcel Service Inc., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 125,843 0.85 14.00%
Long-term debt, including current maturities (fair value) 22,100 0.15 3.15% = 4.09% × (1 – 22.96%)

Based on: 10-K (reporting date: 2023-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 852,653,061 × $147.59
= $125,843,065,272.99

   Long-term debt, including current maturities (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (21.80% + 22.10% + 22.30% + 27.20% + 21.40%) ÷ 5
= 22.96%

WACC = 12.38%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

United Parcel Service Inc., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Interest expense 785 704 694 701 653
Net income 6,708 11,548 12,890 1,343 4,440
 
Effective income tax rate (EITR)1 21.80% 22.10% 22.30% 27.20% 21.40%
 
Interest expense, after tax2 614 548 539 510 513
Add: Dividends 5,611 5,363 3,604 3,552 3,341
Interest expense (after tax) and dividends 6,225 5,911 4,143 4,062 3,854
 
EBIT(1 – EITR)3 7,322 12,096 13,429 1,853 4,953
 
Current maturities of long-term debt, commercial paper and finance leases 3,348 2,341 2,131 2,623 3,420
Long-term debt and finance leases, excluding current maturities 18,916 17,321 19,784 22,031 21,818
Equity for controlling interests 17,306 19,786 14,253 657 3,267
Total capital 39,570 39,448 36,168 25,311 28,505
Financial Ratios
Retention rate (RR)4 0.15 0.51 0.69 -1.19 0.22
Return on invested capital (ROIC)5 18.50% 30.66% 37.13% 7.32% 17.38%
Averages
RR 0.08
ROIC 22.20%
 
FCFF growth rate (g)6 1.70%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 785 × (1 – 21.80%)
= 614

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 6,708 + 614
= 7,322

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [7,322 – 6,225] ÷ 7,322
= 0.15

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 7,322 ÷ 39,570
= 18.50%

6 g = RR × ROIC
= 0.08 × 22.20%
= 1.70%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (147,943 × 12.38% – 5,768) ÷ (147,943 + 5,768)
= 8.16%

where:

Total capital, fair value0 = current fair value of United Parcel Service Inc. debt and equity (US$ in millions)
FCFF0 = the last year United Parcel Service Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of United Parcel Service Inc. capital

FCFF growth rate (g) forecast

United Parcel Service Inc., H-model

Microsoft Excel
Year Value gt
1 g1 1.70%
2 g2 3.31%
3 g3 4.93%
4 g4 6.55%
5 and thereafter g5 8.16%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 1.70% + (8.16% – 1.70%) × (2 – 1) ÷ (5 – 1)
= 3.31%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 1.70% + (8.16% – 1.70%) × (3 – 1) ÷ (5 – 1)
= 4.93%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 1.70% + (8.16% – 1.70%) × (4 – 1) ÷ (5 – 1)
= 6.55%