Morgan Stanley Is Neutral On FedEx, Sets Underweight Rating On UPS

Morgan Stanley’s Ravi Shanker believes that the dual threats of selective insourcing by ecommerce majors and omni-channel shift would result in last mile competition. He assumed coverage of FedEx Corporation UPS with an Equal-Weight rating, and of United Parcel Service, Inc. FDX with an Underweight rating.

These two companies may need to grow rapidly or shrink in order to ensure success in the long term, analyst Ravi Shanker commented, while adding, “FDX appears to have a better starting point for reinvention.”

Investors have been considering parcel stocks as “a play on macro,” while having pricing power due to the concentrated industry structure, with the single real threat being their ability to handle peak season volumes.

“In reality, we believe the industry is not as duopolistic/oligopolistic as consensus thinks. The risks – especially to the domestic Ground business – may be more serious and longer term,” Shanker wrote. The domestic Ground business comprises of about 45 percent of revenues at UPS and around 30 percent at FedEx.

The analyst mentioned that ecommerce giants have begun making initial attempts at a vertical integration into the delivery business. Morgan Stanley’s analysis indicates that an emerging ecommerce logistics network may be able to “at least match the last mile economics of a legacy parcel carrier,” which is at $4-$5 per package in dense areas.

FedEx’s smaller position in B2C, versus UPS, could makes it less vulnerable to long-term disruption. “Adding cheaper valuation, lower expectations, more cost cutting opportunities and a better peak season track record, risk-reward looks better at FDX,” Shanker added. The price targets for FedEx and UPS are $132 and $88, respectively.