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Why Most Analysts Have a ‘Hold’ Opinion on United Parcel Service

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Analysts’ views on UPS

In this final part of our series, we’ll turn to Wall Street for its opinion on United Parcel Service (UPS) after its 2Q17 results. Of the 27 analysts covering UPS, four analysts (14.8%) recommended a “strong buy” for UPS stock. Two analysts (7.4%) recommended a “buy” for the stock. Twenty analysts (74.1%) analysts gave a “hold” opinion, and one analyst (3.7%) advised a “sell” on the company’s stock.

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Analysts’ consensus 12-month target price

After its 2Q17 results, United Parcel Service gave a consensus-12-month target price of $114.30 from analysts surveyed by Reuters. Based on UPS’s last closing price of $109.70, it reflects a potential return of 4.1%. During the previous 12 months ending July 28, 2017, UPS has delivered a return of 1.5%.

Let’s take a look at the 12-month target prices for UPS’s less than truckload (XTN) peers:

  • FedEx (FDX): $230.00 with a 9.3% return potential
  • Old Dominion Freight Line (ODFL): $99.50 with a 1.5% return potential
  • Expeditors International of Washington (EXPD): $54.40 with a -7.4% return potential
  • YRC Worldwide (YRCW): $16.50 with a 24.5% return potential
  • C.H. Robinson Worldwide (CHRW): $68.20 with a 4.6% return potential

What triggered the “hold” ratings on UPS?

During its 2Q17 conference call, UPS’s management appeared confident about its growth prospects and reaffirmed its 2017 earnings outlook. UPS expects to see diluted earnings per share of $5.80–$6.10 in fiscal 2017, which represents an estimated rise of 1%–7% over its 2016 adjusted earnings per share.

UPS’s stock repurchase program saw a repurchase of ~4.2 million shares worth $450.0 million. Coupled with the $770.0 million dividend payment, this results in a cash distribution of ~$1.2 billion. Further stock repurchases could trigger earnings growth to benefit its shareholders.

United Parcel Service undertook a number of measures aimed at increasing its operating efficiency in the medium to long term. ORION, UPS’s technology platform, helped reduce the company’s driver-miles while the number of stops increased 6%.

The company continues to benefit from density building, which drives operating margin growth. Steady growth in the SurePost and Access Point products should improve the company’s operating margin growth in the coming quarters. UPS’s productivity improvement plans include modernizing nearly 50 of its 70 facilities in 2018.

In our view, these measures should result in improvements in its operating margins and bottom line. The net effect could result in the consolidation of UPS’s stock price going forward.

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