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UPS Rating Cut at BMO on Profitability Drop Due to Coronavirus

UPS was downgraded to underperform by BMO Capital Markets, which cited a virus-related profitability decline at the package-delivery icon.
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United Parcel Service  (UPS) - Get United Parcel Service Inc. Report on Wednesday was downgraded to underperform from market perform by an analyst at BMO Capital Markets, who sees a "structural decline in profitability" due to the coronavirus pandemic.

Analyst Fadi Chamoun also lowered his target price to $85 from $95. Shares of the Atlanta company at last check were down 2.2% to $94.36.

Chamoun said in a note to clients that the recession caused by the coronavirus outbreak is likely "to accelerate the pace of growth in residential deliveries, shift volume mix toward larger customers, and potentially drive unfavorable changes in global trade patterns, including near-shoring higher-value goods that typically utilize air cargo."

"While the cyclical headwinds will eventually dissipate at a gradual pace in the coming two years, a structural decline in profitability levels has likely occurred versus pre-covid-19 levels," Chamoun said.

"The result is that UPS’s earnings recovery will likely lag others’ in the transportation and industrial segments."

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On Tuesday, UPS reported first-quarter earnings that missed analysts’ forecasts as the coronavirus pandemic cut into shipments of goods both within and outside the U.S.

While UPS and other carriers have been designated essential services by governments around the world, the shift to moving essential products like personal protection equipment and other goods specific to the covid-19 pandemic hurt earnings, the company said.

"Most other transportation reports so far have been healthy beats, plus UPS had the e-commerce stock-up tailwind going for it," Morgan Stanley analyst Ravi Shanker wrote. "We certainly did not expect one of the biggest misses of the season."

Shanker said the results "exposed structural mix issues resulting from the 'negative flywheel' of e-commerce," and warned that the second quarter "will be significantly more challenging."

Wells Fargo analyst Allison Poliniak-Cusic lowered her price target to $111 from $121 and affirmed an overweight rating on UPS shares.

The analyst said the mix was the main drag, and with the mix unlikely to swing back quickly, she came away from the company's earnings call with damped expectations for the rest of 2020.