On Monday, Barclays made a significant adjustment to its view on the shipping giant UPS (NYSE:UPS), downgrading the stock from Equalweight to Underweight, while also setting a new price target of $120.00. The firm cited multiple challenges that could impact UPS's near-term earnings and long-term prospects.
The downgrade comes in the wake of what Barclays perceives as a "still lackluster freight environment," which is expected to pose an earnings risk for UPS. The concern is exacerbated by the potential loss of business from Amazon (NASDAQ:AMZN), as well as increased competition from a more efficient FedEx (NYSE:FDX) and the growth of lower-margin e-commerce and USPS channels.
Barclays' decision was influenced by FedEx's recent disappointing results and its commentary on a "very competitive" domestic US parcel pricing environment. These factors contribute to the perceived near-term risk to UPS's earnings and raise questions about the achievability of the company's ambitious guidance for the latter half of 2024.
The integration of the USPS Priority Mail contract, which UPS recently added, is anticipated to bring additional revenue in the fourth quarter. However, Barclays warns of near-term headwinds due to the startup costs required to launch a significant daytime airline operation to support the contract, drawing a parallel to the impact such operations had on FedEx's profitability for many years.
Barclays also pointed out that while recent growth from lower-value e-commerce providers has led to volume gains for UPS this year, these have come at lower price points, which have put pressure on the profitability of the company's core Domestic segment. This dynamic further informs the firm's cautious stance on UPS's stock.
In other recent news, United Parcel Service (NYSE:UPS) has announced plans to hire 100,000 seasonal workers for the holiday season, despite an overall expectation of fewer seasonal job additions this year among U.S. companies. This comes alongside the company's recent acquisition of German-based Frigo-Trans and its sister company BPL, specialized providers of complex healthcare logistics, aiming to enhance UPS's end-to-end capabilities in Europe.
Citi, initiating coverage of UPS, sees potential for the company to overcome recent challenges that have impacted its financial performance. The firm highlights the attractive dividend yield offered by UPS, currently at nearly 5%, the highest it has been in the past decade.
Recent developments have also seen a series of strikes and negotiations across various industries in the United States, with UPS agreeing on a new five-year contract with Teamsters union workers last year. These are some of the recent developments affecting UPS, providing a snapshot of the company's current operations and future plans.
InvestingPro Insights
While Barclays has taken a cautious stance on UPS, InvestingPro data and tips offer additional context for investors. UPS currently boasts a market capitalization of $116.43 billion, reflecting its significant presence in the logistics industry. The company's P/E ratio stands at 22.16, which, when adjusted for the last twelve months, drops to 18.82, suggesting a potentially more attractive valuation than initially apparent.
InvestingPro Tips highlight UPS's strong dividend history, having raised its dividend for 14 consecutive years and maintained payments for 26 years. This track record may appeal to income-focused investors, especially given the current dividend yield of 4.8%. Additionally, UPS is noted as a prominent player in the Air Freight & Logistics industry, which aligns with Barclays' focus on the competitive landscape and UPS's market position.
Despite the challenges outlined by Barclays, InvestingPro Tips indicate that analysts predict UPS will remain profitable this year, and the company has been profitable over the last twelve months. This profitability, combined with UPS operating with a moderate level of debt, could provide some stability as the company navigates the competitive pressures and potential earnings risks mentioned in the Barclays report.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for UPS, providing a broader perspective on the company's financial health and market position.
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