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UPS Gets Rare Sell Call on Rising Competition From Amazon, FedEx

A UPS delivery truck in San Francisco, California, US, on Tuesday, July 25, 2023. United Parcel Service Inc. reached a tentative agreement to renew a five-year labor contract with the Teamsters ahead of the July 31 deadline, giving relief to stressed shippers and removing a share-price overhang for investors concerned about a costly strike. Photographer: David Paul Morris/Bloomberg (David Paul Morris/Bloomberg)

(Bloomberg) -- United Parcel Service Inc. received a rare sell recommendation as Barclays expressed concern on the shipping giant’s earnings ahead of third-quarter results later this week.

Analyst Brandon Oglenski downgraded the Atlanta-based company to underweight from equal-weight, noting likely near-term risk to earnings from continued weakness in parcel demand as well as longer-term challenges stemming from a potentially “smaller relationship” with Amazon.com Inc. and more competition from rival FedEx Corp.

“Long-term pressures from Amazon, non-union FedEx competition and limited dividend growth paint a relatively tough outlook for UPS shares,” Oglenski wrote in a note published on Monday.

Shares in UPS fell 3.4% Monday in their biggest one-day drop in nearly three months. The stock now has 17 buy-equivalent recommendations, 14 holds and three sells, with an average price target of $145, among analysts tracked by Bloomberg. UPS shares are down 16% this year.

UPS’ upcoming third-quarter earnings report on Thursday follows last month’s disappointing print from rival FedEx, which warned investors that its business would slow in the year ahead. Both companies have struggled with expedited shipping, with more customers switching to slower delivery options to save money.

Oglenski sees Amazon remaining a “threat” to UPS in the longer term, noting that the retail giant is the parcel company’s largest customer. With the size of Amazon’s delivery network rivaling that of UPS, the analyst said the potential loss of volume from Amazon will be a large overhang on the stock for years to come.

“As UPS pursues stronger domestic US profitability, pricing will likely be a large driver for management to leverage, but also a large incentive for Amazon to develop long-term solutions to insource greater volumes from UPS to the company’s large delivery network,” Oglenski said.

FedEx also presents a challenge to UPS in the long term. Oglenski flagged the merged Express and Ground operations creating risk that could limit the value of UPS shares. 

“Investors should consider future competition from a merged FedEx US Express and Ground non-union operation, potentially rivaling or exceeding productivity of UPS, which will be constrained on a relative basis by union work rules as well as contracted wages and benefits,” he added.

--With assistance from Katrina Compoli.

(Updates share-price moves and chart.)

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