Skip to main content

Analysts are warming up to

United Parcel Service

(UPS) - Get United Parcel Service, Inc. Class B Report

, with two brokerages upgrading the company and another issuing upbeat comments in recent days.

On Tuesday morning, Merrill Lynch upgraded UPS to buy from neutral, telling investors that the company is trading at its lowest premium since the market trough in March of this year.

Ken Hoexter, the Merrill analyst covering UPS, set a price target of $70 on the shares, which have fallen 0.7% so far in 2003 amid labor woes and high fuel prices, compared with a 19.8% gain for rival


(FDX) - Get FedEx Corporation Report

. FedEx

releases earnings on Wednesday.

"Our $70 price objective is based on a 25.8 multiple of our 2004 earnings-per-share estimates, just above the company's historical trading range," said Hoexter. "We continue to compare UPS against a best in breed for relative valuation, and at 23 times our 2004 EPS estimate, the company is trading just below the average of some of its best-in-breed peers, which include


(MSFT) - Get Microsoft Corporation Report



(CSCO) - Get Cisco Systems, Inc. Report

TheStreet Recommends


Procter & Gamble

(PG) - Get Procter & Gamble Company Report


General Electric

(GE) - Get General Electric Company Report


The Merrill upgrade follows positive comments from Bear Stearns on Monday. Bear Stearns analyst Edward Wolfe reiterated his outperform rating on the company's shares, setting a 15-month price target of $83 and telling investors that the company's stock underperformance represented a buying opportunity. The same day, Lazard Freres upgraded UPS to buy from hold.

"UPS stock is now trading at a discount of 9% to its past three-year average forward price-to-earnings multiple compared to the vast majority of transports (including FedEx) which are now trading at historically high end valuations compared to the past three years and longer," said Wolfe. "We expect the stock to trade upward into its Oct. 30 analyst day."

UPS shares have already begun to move higher, climbing 94 cents, or 1.5%, to $63.55 in early Tuesday action, in reaction to the Merrill upgrade. In Monday's session, shares rose $1.10, or 1.8%, to $62.61. Before this week's barrage of positive notes, UPS shares had underperformed the S&P 500 by 18.3%, year to date.

But while Bear and Merrill are both bullish on UPS' prospects, the rest of Wall Street still prefers rival FedEx, which is the market-share leader in high-margin express shipping. Of the 22 analysts covering UPS, only five rate it a buy, while nine of FedEx's 22 analysts rate it a buy, according to Bloomberg.

And with FedEx releasing earnings before the start of trading on Wednesday, the nascent rally in UPS shares will face its first test, especially if its rival makes negative comments about the economic recovery or bullish comments about stealing market share in ground shipping -- UPS's bread and butter. While analysts are attracted to UPS's valuation, all note that such investments face risk if the manufacturing sector can't show sustained improvement.

"The company reiterated its July comments that we seem to be bouncing along a bottom in the manufacturing sector, as we have for more than 12 months," noted Merrill's Hoexter. "In the second quarter,

UPS noted that business improved a bit, led by financials, telecom, technology and retail, and they are hoping for that trend to continue."

There are other risks to UPS upside scenario, as well, like the fact that the company's contract with 2,000 pilots expires at the end of 2003 and the possibility that rivals, especially



and the U.S. Postal Service, cut rates to steal small-package volume.

But Hoexter dismissed these potential issues in his upgrade, telling investors that recent meetings with management have "alleviated some of our concerns."