UPS and FedEx Ratings Cut by Barclays on Joblessness Concern

A Barclays analyst downgrades UPS to underweight and FedEx to equal weight, citing concern about unemployment caused by the pandemic.
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United Parcel Service  (UPS) - Get Report and FedEx  (FDX) - Get Report were downgraded Friday by a Barclays analyst who expressed concerns about unemployment levels caused by the coronavirus pandemic shutdown.

At last check UPS shares were down nearly 1% to $101.25, while FedEx was up 2.1% to $121.52.

Analyst Brandon Oglenski downgraded UPS to underweight and FedEx to equal weight. 

He cut his rating on the transport sector to negative from neutral. He told clients in a note that "while the covid-19 pandemic duration remains unknown, we are increasingly concerned unemployment levels will lead to lasting economic challenges." 

"With economic fundamentals rapidly deteriorating to levels last witnessed in pre-World War II periods, ... it is prudent to reduce exposure in cyclical transportation stocks, especially given sector valuations that remain at or above median cycle levels for most large-cap equities," he wrote. 

While both companies should benefit from e-commerce deliveries, Oglenski said, margins will be challenged by negative operating leverage.

"While UPS maintains plenty of balance-sheet capacity," he said, "we expect operating results through 2021 will be negatively impacted by lower industrial activity and business-to-business volume challenges."

UPS, Atlanta, should benefit from increased e-commerce residential shipments,  Oglenski said, but investors should "expect margin headwinds given less cost efficiency relative to B2B mix." The analyst also expects the same headwinds to challenge FedEx.

"We see significant downside to current earnings expectations and given continued sizable capital investments," he said regarding FedEx, Memphis. 

"We suspect investors will not be willing to pay a materially higher valuation for a company with limited historical free-cash-flow generation."

However, Oglenski said "long-term investors are likely to remain focused on the company’s industry leading and high growth ground business as well as the recent management decision to deliver certain express packages with ground contractors."

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