Barclays turns bearish on the courier's stock, citing continued weak parcel demand and intense competition
Shares of United Parcel Service Inc. took a hit on Monday after a Wall Street analyst made a rare call to sell, citing near-term concerns over what weak parcel demand will mean for its earnings.
Barclays analyst Brandon Oglenski turned bearish on the package-delivery giant's stock (UPS) just days before UPS is scheduled to release its third-quarter results.
Besides what the earnings report might show, Oglenski is worried about longer-term pressures on the stock because of competition from FedEx Corp. (FDX), the potential loss of Amazon.com Inc. (AMZN) volumes and limited dividend growth.
He cut his rating on UPS to underweight from equal weight, with his $120 price target implying about 9% downside from current levels. Of the 31 analysts surveyed by FactSet who cover the stock, only three are bearish, while 15 are bullish and 13 are neutral.
UPS shares were down 3.1% in afternoon trading Monday, enough to pace the Dow Jones Transportation Average's DJT decliners.
"Following disappointing results from FedEx last month and commentary suggesting a 'very competitive' domestic U.S. parcel pricing environment, we see near-term risk to UPS earnings and management's rather aggressive back-half 2024 guidance," Oglenski wrote in a note to clients.
Read: FedEx's lower full-year forecast sinks stock, as customers look to save on deliveries.
UPS is slated to report quarterly results on Thursday before the opening bell.
The current FactSet consensus is for earnings per share to climb to $1.63 from $1.57 a year ago, and for revenue to rise 3.3% to $22.10 billion.
It's understandable those on Wall Street would be worried, considering the stock suffered a record selloff on the day UPS reported second-quarter results in July.
At that time, the company missed profit expectations for the first time in four years, while revenue missed for the eighth consecutive quarter.
Despite those misses, UPS only slightly trimmed its full-year revenue outlook to $93 billion, which was just below the midpoint of the previous guidance range of $93.25 billion. That nearly in-line guidance is what Oglenski sees as "aggressive."
Keep in mind that UPS's stock has fallen on the day earnings were reported in eight of the past 10 quarters, by an average of 5.5%.
Oglenski noted that there were some potential positives for the company's outlook, such as the recently added Priority Mail contract with the U.S. Postal Service and recent growth from lower-value e-commerce providers.
But while the USPS contract could boost revenue in the fourth quarter, the startup costs to launch operations to support the business will likely weigh on earnings in the near term.
And growth from lower-value e-commerce providers also comes with a cost, as lower price points for service has hurt domestic profitability.
Longer term, Amazon could be a problem.
Oglenski said the e-commerce giant, which represented 11.8% of UPS's total 2023 revenue, operates its own domestic delivery network that rivals the size of UPS.
Therefore, "we see insourcing risk remaining a large overhang in the years to come, especially as UPS attempts to extract higher pricing from the business," Oglenski wrote.
Regarding the dividend, the last increase announced in May was by just a penny, to $1.63 a share. Oglenski believes further growth is likely to be "stalled for the next few years," as UPS needs to compete with a more efficient FedEx, which unlike UPS has a nonunion workforce.
Meanwhile, UPS's dividend yield at current prices is 4.94%, or more than double FedEx's yield of 2.05% and nearly four times the implied yield for the S&P 500 SPX of 1.27%.
UPS shares have lost 16.3% this year to date, while FedEx's stock has gained more than 6.4% and Amazon shares have run up 24.2%. Meanwhile, the Dow Jones Transportation Average has edged up 2.1% while the S&P 500 has rallied 22.7%.
-Tomi Kilgore
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