Analyst Upgrades UPS To Buy, Says Amazon Concerns Are Overdone

Analysts at Deutsche Bank said Friday that investors shouldn't be buying United Parcel Service, Inc. UPS, a call Loop Capital Markets disagrees with.

The Analyst

Loop Capital Markets' Rick Paterson upgraded UPS' stock from Hold to Buy with an unchanged $131 price target.

The Thesis

Shares of UPS are flirting with a new 52-week low and is down nearly 20 percent over the past three weeks, Paterson said in a note. The stock's decline can be attributed to the company's announcement of higher-than-expected investments in aircraft and media reports suggesting Amazon.com, Inc. AMZN's is exploring its own delivery system which may at the very least partially cut UPS out of its delivery ecosystem.

There may be some legitimate concern with UPS' spend through 2020 as it will impact the company's "historically strong" free cash flow over the period, Paterson said, but the Amazon threats appear to be overblown. Amazon accounts for an estimated 4 to 6 percent of UPS' lower margin revenue and under a worst case scenario losing Amazon's entire business is "hardly a disaster."

If Amazon wants to control its own delivery system it needs to keep its facilities, trucks and aircraft fully utilized so it can have some pricing power over UPS, Paterson said. For the time being this scenario isn't probable even when considering Amazon's "deeper pockets and maybe more patience."

Amazon would need to spend tens of billions of dollars over three decades to maintain a delivery business, which even for a "different animal" like Amazon "isn't smart."

Price Action

Shares of UPS were trading higher by nearly 2 percent Monday at $107.59.

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