Morgan Stanley Says UPS Risk/Reward Looking Unfavorable

Although United Parcel Service, Inc. (NYSE: UPS) reported an in-line quarter and left its guidance unchanged, management commentary highlighted headwinds ahead. Morgan Stanley’s Ravi Shanker maintained an Underweight rating on the company, while reducing the price target from $92 to $91.

Analyst Ravi Shanker commented that cost headwinds would likely limited UPS’s 2017 earnings, and secular headwinds could make long-term targets unreachable.

Performance In 2H, FY17

While leaving its full-year guidance unchanged, management indicated that 3Q could be a challenging quarter with one less operating day and tough worker comps. Ecommerce and peak season could help drive y/y EBIT growth of 9-11 percent in 4Q, Shanker mentioned.

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The EPS estimate for FY16 has been reduced from $5.86 to $5.80. The analyst commented that the FY17 estimates appeared under pressure, adding, “We believe it is debatable as to whether FY17 EBIT can grow at all y/y without a strong macro tailwind.” The EPS estimate for FY17 has been reduced by ~3 percent to $6.00 and stands ~4 percent below the current consensus expectation.

Looking Beyond

For the company to achieve its long-term targets, it would need to generate a 3-year EBIT CAGR of 11-14 percent from 2016 to 2019, as well as a 3-year EPS CAGR of 9.5-16 percent. “Unless we see a significant macro acceleration very soon, these targets look very hard to achieve,” Shanker wrote.

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