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UPS stock is now a Buy despite recession fears: analyst

It's time to back up the truck on UPS stock, according to Deutsche Bank analyst Amit Mehrotra.

Mehrotra upgraded shares of the logistics giant. The stock rose more than 1% in premarket trading.

"It's easy to be neutral or negative on UPS in the current environment, but in our experience that's exactly the time to get more positive, especially under the stewardship of the current management team," Mehrotra wrote in a note to clients published Tuesday.

He added: "Recall, we downgraded UPS shares to hold this time last year, when we said that changing macro conditions and the upcoming labor contract negotiation were greater concerns to us in the context of a more than doubling of equity value since the start of the pandemic. While contrarian at the time, we believe those concerns are now fully reflected in shares and widely held by market participants."

Here are the details behind Deutsche Bank's upgrade:

  • Rating: Buy (upgrade from hold)

  • Price Target: $220 (up from $197)

  • 2023 EPS Estimate: $13.39 (10% above current analyst consensus)

In the near-term, Mehrotra says investors should to shift their focus when looking at UPS' fundamentals.

"We think market participants are overly focused on volume growth and not on mix and productivity initiatives, which we think can drive positive revenue growth and solid contribution margins despite modestly lower domestic volumes. Over the mid term, we think the upcoming teamsters contract negotiation will be more benign than expected, which partly reflects the signifiant cost of living adjustments (COLA) and market rate adjustments (MRAs) made to the current wage structure (UPS's strong results in the third quarter and second half 2022 estimate is despite $600 million of incremental union wage and benefit costs). We also see potential for negotiations to yield opportunity for UPS to gain additional market share via time in transit."

Snow falls at the United Parcel Service (UPS) WorldPort hub located at Louisville Muhammad Ali International Airport in Louisville, Kentucky, U.S., February 15, 2021. REUTERS/Bryan Woolston
Snow falls at the United Parcel Service (UPS) WorldPort hub located at Louisville Muhammad Ali International Airport in Louisville, Kentucky, U.S., February 15, 2021. REUTERS/Bryan Woolston

Mehrotra assigned a high grade to UPS CEO Carol Tomé for driving a better business, which should yield strong results over time.

"We are also emboldened by impressive operating performance and potential for further productivity. It's no small feat, for example, to expand margins in a highly capital intensive business when volumes are down and costs are accelerating, which is what UPS did in the last three quarters. And, there appear to be numerous levers to allow consistent positive operating leverage. The company recently noted that just a ten minute improvement within its integrated network is worth $257 million to the bottom line (25 basis points of consolidated margin), which speaks to the opportunity afforded by the company's scale. We are also intrigued by the company's comments around attacking density challenges... which focus on temporarily holding orders at the first mile until better density can be achieved on the last mile (while still meeting customer service commitments). This can drive a 90% reduction in last mile unit costs (from $5.50 per package to 60 cents)."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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