Downgrades FedEx on trade risk, upgrades UPS on domestic delivery

Johan Nilsson | AFP | Getty Images

Cargo aircrafts from UPS, FedEx and West Air Europe are parked at Cargo City at Arlanda airport in Stockholm.

UBS swapped out its pick of parcel delivery services Monday, raising its near-term outlook on UPS stock to a “buy” rating while lowering its rating on shares of FedEx to “neutral.”

FedEx “is exposed to risk from tariffs and potentially slower trade activity,” UBS analysts wrote in a note. About 55 percent of FedEx revenue stems from its “global Express business” and UBS does “not expect” to see benefits from the company’s $4.8 billion acquisition of TNT Express “show up in the next few quarters.”

On the other hand, UPS has “multiple ways to win,” the firm said. UBS believes the company may be poised to show “improved Domestic Package margin performance and stronger operating income growth” next year, as UPS benefits from a more cost effective business and increasing revenue.

“We expect UPS’s Transformation initiative to generate significant cost savings” which is in addition to the expected $800 million to $1 billion “UPS’s network initiatives,” UBS said. “We believe these two programs can support a transition to Domestic Package margin improvement in 2019,” after the company’s “weak margin performance the past several years.”

UBS lowered its price target on FedEx to $256 per share, from $283 per share, and raised its price target on UPS to $125 per share, from $121 per share.

Shares of UPS rose over 1 percent in trading and are down over 8 percent this year, while FedEx stock fell over 1 percent, down about 6 percent this year.

While the UPS agreement with Teamsters has yet to be finalized, UBS wrote that it “may also facilitate growth.”

“[A partnership with Teamsters] provides a labor cost structure which allows UPS to be more aggressive in offering Saturday & Sunday delivery,” the firm said.

In the case of both companies, UBS said “the Amazon risk” was “a long term factor.”