BofA hikes UPS rating to Buy, says freight recession nearly over

Investing.com -- Bank of America (NYSE:BAC) (BofA) analysts upgraded United Parcel Service Inc (NYSE:UPS) stock to Buy from Neutral on Thursday, citing an anticipated end to the freight recession by 2025 and potential gains from the company's pricing model and cost initiatives.

“We believe these gains will work to offset potential volume losses as it insources the remainder of its SurePost last mile volumes from the US Postal Service, continued Amazon (NASDAQ:AMZN) revenue glide down, and its high-cost Teamster labor contract,” analysts Ken Hoexter and Adam Roszkowski said in a note.

UPS shares climbed 1.5% in the premarket trade.

The analysts think the end of a nearly 3-year freight recession is near, based on the findings of their proprietary BofA Truck Shipper Survey Demand Indicator. The gauge ticked up to 59.8 on Friday, marking its highest level in approximately 3 years.

“Our Survey has historically been a leading indicator for Transport demand and indicates the market is on the cusp of growth,” analysts continued.

The upgrade comes with a maintained price objective of $150 and expectations for UPS to continue its trend of cost controls and pricing focus into the fourth quarter of 2024.

BofA projects a 4% year-over-year increase in UPS's earnings per share (EPS) for 4Q24, targeting $2.56, slightly above the consensus estimate of $2.52. This follows a period of six quarters with an average of 33% year-over-year EPS declines.

BofA's outlook for UPS is bolstered by the company's Fit To Serve cost-cutting model, which includes employee reductions and the leveraging of automation through facility closures. The report also notes UPS's adoption of more aggressive dynamic pricing strategies, such as rate increases for low-value Chinese e-commerce sellers starting in 4Q24.

Analysts expect improved freight activity to aid UPS's results, forecasting Domestic volumes to grow for the third consecutive quarter after a stretch of decline. This volume growth, combined with cost-cutting and a focus on yield, is expected to help UPS's Domestic operating margin approach its near 10% goal by the end of the year, with a 9.5% target for 4Q24.

Looking ahead to 2025, BofA targets UPS's Domestic revenue to reach $63 billion, marking a 5% year-over-year increase, and projects Domestic Operating margins to improve by 110 basis points to 10.7%.

The bank’s $150 price target on UPS stock is set below the midpoint of UPS's historical price-to-earnings range, reflecting the balance between an improving macroeconomic environment and the company's strategic cost rationalization and pricing focus.

This article first appeared in Investing.com