E-Commerce Driving Outperformance For UPS

Advantage In E-Commerce

Management's upbeat tone largely results from the company's ability to take advantage of growing e-commerce, according to Wetherbee. "In general the tone was upbeat as e-commerce is driving significant volume outperformance vs. typical freight volume," stated the analyst.

Wetherbee forecasted continued benefits from e-commerce in the long term. "Over the next several years we believe UPS will pivot toward EPS growth at the expense of returns as it ramps up infrastructure spending to keep pace with volume growth from e-commerce" stated the analyst.

Additionally, Citi believes the healthy U.S. macro environment communicated by management supports a continued focus on yield improvement, while justifying UPS's continued capacity investment.

Related Link: Barclays Sees Brexit Effects Spreading To Transport Stocks

Brexit Taken Care Of

Noting Brexit, Citi believed UPS will "likely be viewed as a safe haven, given US exposure, high FCF and returns" and expects less volatility and relative outperformance vs. FedEx Corporation FDX.

Wetherbee also expects tailwinds from capacity growth to sustain a probable FX headwind.

Business To Consumer Growing Threat

Business to Consumer activity comprised 46 percent of domestic volume and has grown quickly within UPS's mix. The shift has applied pressure on UPS's profit margins in the past, but UPS has a plan to reduce future pressure, according to Wetherbee.

"UPS is intent on using Orion, hub automation, and other initiatives to essentially hold the cost per package flat to slightly higher from 2016 through 2019," stated the analyst.

Despite Wetherbee's continued positive analysis, Citi maintains UPS's Hold rating with a $109.00 price target.

At the time of writing, United Parcel Services traded at $106.21, up 1.47% on the day.