Analyst Fadi Chamoun at BMO Capital recently lowered his price target for UPS (NYSE: UPS) stock to $125 from $130 but maintained an outperform rating on the stock. Even though the analyst lowered the price target, it still represents a 29% premium to the current price, and an outperform is de facto a buy recommendation.
A balanced viewpoint on UPS
The analyst’s reasoning makes perfect sense. On the plus side, UPS’ first-quarter earnings were above expectations, and management’s ongoing reduction of lower- or no-margin Amazon.com delivery volume, while investing in growing higher-margin volume, is a long-term benefit as well. Furthermore, management expects to take $3.5 billion out of expenses due to its ongoing efficiency initiatives and the reduction in Amazon volume.
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Moreover, there’s no way to get around the fact that trade conflicts harm transportation companies. And the uncertain environment surrounding the tariff conflict led UPS management to forgo updating investors on its full-year target in the recent earnings presentation.
Is UPS stock a buy?
It’s a buy if you are prepared to be patient and have a tolerance for bad news. UPS may cut its guidance if the trading environment doesn’t improve and its dividend is not well covered by cash flow. The lack of a full-year guidance update is ominous and may lead to UPS missing its initial full-year guidance for the third year running.
On the other hand, its strategic initiatives (e.g., reducing Amazon volume, cutting costs, focusing on higher-margin deliveries) make sense and help set the company up for long-term growth. As such, the outperform rating makes sense — just be prepared for volatility if you buy in and don’t rely too heavily on the dividend.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
