United Parcel Service Inc. (UPS - Get Report) stock, which has declined about 10% since the start of the year, has been oversold and the Atlanta-based shipping giant's current stock price is low enough that investors should buy it, according to Stifel.
"We believe the package and general freight markets remain strong, and the stock has sold off to a valuation that we believe reasonable considering the risks ahead and the increased capital investments expected over the next several years," Stifel analyst David Ross wrote in a March 6 research note.
The firm upgraded its rating on the stock from Hold to Buy, but cut the price target by $6 to $121 per share, which still implies roughly 15% upside from the closing price on Monday, March 5.
UPS shares rose 1% to $106.86 at 12 p.m. EST on Tuesday, March 6.
The company with a market capitalization of $91.9 billion saw its stock drop this year following reports that Amazon.com Inc. (AMZN - Get Report) will launch a delivery service for businesses and after revealing holiday shipping costs along with larger-than-expected capital expenditure guidance for the year ahead.
UPS forecasted 2018 capex between $6.5 billion and $7 billion, which will mostly be dedicated to investments in new technology, aircraft and automated capacity.
"Our growth opportunities are accelerating," UPS Chief Financial Officer Richard Peretz said in the fourth-quarter earnings statement. "The strong economic outlook and UPS's high return on invested capital generates a unique opportunity to create additional long-term value by increasing capital investments. These investments enable UPS to execute our strategy and we are well-positioned for 2018 and beyond."
Stifel's Ross noted that the capex outlook range is significantly above the 2017 level and nearly three times the annual capex rate of 2011 to 2016.
"Investors said, 'There goes my cash!' And that's true -- there should not be too much excess cash above the amount needed to cover the dividend the next couple of years," said Ross.
Still, it is the company's current valuation that is most compelling to Stifel. Ross said the UPS's story hasn't changed in the past month, and now believes the price per share is too low.
"Assuming Amazon remains a significant and profitable customer, and the Teamsters do not go on strike or extract significantly higher pay increases from the company in its next long-term contract (to be negotiated this summer), we believe the shares have been oversold and find it the most attractive dividend play in large-cap U.S. transportation with a compelling total return story," Ross said.
There are 10 Buys, 17 Holds and two Sells on the stock, according to Bloomberg data.