Analyst: UPS Network Overhaul Could Improve Margins

United Parcel Service Inc UPS’s network transformation plans could improve margins and give the company additional upside earnings potential, according to Bank of America Merrill Lynch.

The Analyst

BofA's Ken Hoexter upgraded UPS from Neutral to Buy and raised the stock’s price target from $120 to $144.

The Thesis

Over the coming months, UPS plans to begin a network overhaul that could include ongoing automation of facilities, a recently launched voluntary management retirement program and an overhaul of its executive management team, Hoexter said in a Monday note. 

This overhaul could prove to be a turning point for UPS and improve margins, which have dropped to single digits for the first time since 2010, the analyst said. 

“We have increased confidence that it will strive to reduce costs.”

The company has high growth potential as a result of e-commerce growth in the domestic economy, Hoexter said. 

“If UPS launches a $1-billion program … it would represent a 1.5-percent reduction in opex (currently $68.5 billion), but a 12-percent boost to operating income and a 130 bps improvement to operating ratio." 

Price Action

UPS shares were up more than 1 percent at $116.71 at the time of publication Monday. 

Related Links:

FedEx, UPS Shrug Off Amazon Challenge...For Now

'Shipping With Amazon' To Launch In US; UPS, FedEx Investors Sell

Public domain photo via Wikimedia.