The Days Of UPS Shares Trading At A Premium To The S&P May Be Numbered

United Parcel Service, Inc. UPS announced its Q4:16 results and FY 2017 guidance well below the estimates.

BMO Capital’s Fadi Chamoun downgraded the rating on the company from Outperform to Market Perform, while lowering the price target from $130 to $115.

Q4 Miss

The analyst explained that the shortfall was primarily driven by weaker than expected operating margin in the U.S. Domestic segment, “where an unfavorable mix shift and upfront investments in expansion/modernization weighed on results.”

However, United Parcel’s International results were better than expected, although Chamoun expects the company to face meaningful FX headwinds during 2017, which could potentially hit profitability by 4–8 percent year-on-year.

“With capital spending rising, margins/ROIC contracting in the near term, and EPS and cash flow growth muted, the stock lacks a positive catalyst,” the analyst stated.

United Parcel’s mix shift in its U.S. domestic network has been accelerating, while the company intends to pull forward its capital spending to driven growth and improve underlying profitability over the medium term.

Muted 2017

In addition, EBIT margins are likely to continue to be muted through 2017, with a slight improvement in momentum in 2018, due to the absence of improving industrial production and B2B shipments.

“The International segment continued to perform very well in Q4/16 helped by favorable forex, exceeding our expectations. However, forex exposure turns negative in 2017 to the tune of $400m and is projected to reduce segment EBIT between 4 percent and 8 percent,” Chamoun stated.

Lower profitability and increased capex are expected to pressure ROIC and the company’s share buyback program for 2017.