United Parcel Service Inc. (UPS) and FedEx Corp. (FDX) are down 10.7% and 8.3% respectively in the first half of 2018, compared to the S&P 500's 2.3% gain over the same period. Despite recent weakness, one team of bulls on the Street views the carriers as set to outperform, downplaying concerns regarding Amazon.com Inc.'s (AMZN) push into the delivery space and broader fears regarding a looming global trade war.
Last week, Seattle-based e-commerce giant Amazon launched a program to support entrepreneurs launching local delivery startups. Against this backdrop, analysts at Bernstein still view UPS and FedEx as attractive buys, as reported by Barron's. (See also: 9 Companies Amazon Is Killing.)
UPS to Gain 30% on New Union Contract
In June, UPS announced a five-year contract with the Teamsters union, potentially paving the way for Sunday delivery, increased employee pay and offers of more flexibility within UPS's cost structure by adding "hybrid drivers." While new hybrid drivers have been a source of contention between the parties, Bernstein's David Vernon writes that an agreement to limit the growth of them to 25% of the total number of full-time carriers is better than expected. Hybrid drivers should "increase the flexibility with which UPS is able to accommodate future growth from e-commerce and lower the effective rate of wage growth at the margin," wrote Bernstein.
Vernon rates UPS at outperform with a $137 price target, reflecting a 30% upside over 12 months from Tuesday morning.
FedEx Stock 'Interesting at This Price'
Vernon admitted that investors hold legitimate concerns about increasingly protectionist rhetoric and tariffs from the White House, due to the fact that FDX stock relies on healthy global trade and a solid economy. To add to the bearish debate, the analyst noted that investors were not pleased with management's hint that it would increase capital expenditures during a recent conference call, as reported by Barron's.
That being said, the Bernstein analyst wrote that risk is "starting to get priced in and we still see idiosyncratic growth from subsidiary TNT and inflection in Ground margin which make the stock interesting at this price." (See also: Amazon Buys PillPack—Rx Chain Stocks Lose Billions.)