Analyzing the Valuation Trend of Courier Services

The economic upturn since 2009 has improved growth prospects for the courier companies. Industry sales have grown from $205 billion in 2009 to $233 billion in 2014. This coupled with improving industry margins has led to improving industry valuations.

In the last seven quarters, forward PE (or price-to-earnings) for the courier services industry has almost doubled from 9.6x in 3Q13 to 17.5x in 1Q15. Given the bright future prospects, the PE ratios are expected to further increase to 18x in 3Q15.

The PE ratio is calculated by dividing the price of the stock by its earnings per share. The most common method is to use the earnings of the last four quarters, which is known as the trailing PE ratio. A forward PE ratio, on the other hand, uses estimated earnings for the next four quarters.

PE is the most common multiple used to determine how cheap or expensive a stock is. However, a PE ratio by itself does not tell us anything. It is also important to consider the company’s future growth prospects and the industry PE ratio to determine if a stock’s PE is high or low. A high PE multiple indicates that the market expects the company to do extremely well in the future.

The major advantage of a PE ratio is that it is easy to calculate and thus very widely used. However, one of the major drawbacks of a PE ratio is that PE can sometimes be misleading. A low PE would not necessarily mean that the stock is undervalued. Also, earnings are highly prone to manipulations. This metric doesn’t take into account one-time gains or extraordinary events.

The EV-to-EBITDAR (enterprise value to earnings before interest, tax, depreciation, amortization, and rent) multiple helps overcome some of the drawbacks of the PE multiple. Like the PE ratio, it also tells us how expensive a particular stock is. It measures the price paid by an investor (enterprise value) for the company’s cash generation (or EBITDAR). One of the major advantages of this multiple is that it is unaffected by the capital structure of a firm. Also, the EV-to-EBITDAR multiple is less prone to manipulations.

However, the metric does not capture the tax effects or the cost of assets. Also, it may not account for all the debt in the firm, especially in the form of leases.

Major courier service providers in the US include United Parcel Service (UPS) and FedEx (FDX). Smaller rivals include Air T (AIRT) and Air Transport Services Group (ATSG). FedEx forms the largest holding in the iShares Transportation Average ETF (IYT) at 13.14%, while UPS forms a 7.65% holding. IYT also has 4.19% exposure to Expeditors International (EXPD).