Credit Suisse "Outright Positive" on UPS for First Time in Five Years
Jeeho Yun and Alex Moreno
For the first time in five years UPS analysts at Credit Suisse are "outright positive" on shares of UPS, causing them to upgrade shares to Outperform from Neutral on Monday, while slapping a street high $192 price target on shares.
Analysts at Credit Suisse attributed their bullishness to several catalysts, including cost-cutting measures. The Swiss investment bank forecasts that capital expenditures will take a steep dip from a “multi-year high,” which may open the door to other “significant opportunities to reduce capital intensity.” And with domestic pricing power shifting “towards the carriers,” coupled with a new CEO in Carol Tomé, Credit Suisse is confident in UPS's ability to achieve “FCF conversion of close to 100% over the next few years, with ROIC returning to previous peak levels by 2022.”
Carol Tomé addressed the new workplace culture and demand growth on the Q2 conference call, stating, “we assumed demand would slow. Instead, we saw just the opposite. Due to ongoing COVID-related sheltering in place, retail store closures and changes in U.S. consumer spending fueled by the economic stimulus, we experienced unprecedented demand and record high volume levels. As a result, our second quarter performance was stronger than we expected.”
There are a few potential concerns, however, that investors must consider. Namely, the trend that delivery systems have suddenly become an “investable” sector given the current pandemic, which may or may not hold weight in the coming months as the economy reopens. Additionally, as this specific sector makes it difficult to differentiate the idiosyncrasies among the parcel powerhouses, the question now becomes - UPS or Fedex? In short, Credit Suisse likes both but expects Fedex to lag behind the Atlanta-based company in both cash flow and returns. In the end, Credit Suisse remains heavily optimistic on UPS’ future as they believe the market under appreciates the factors mentioned above.
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Disclaimer: At the time of publication, we have no positions in any of the securities mentioned in this article. We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.