Having underperformed the broader market and rival Fedex Corp. (FDX) this year, things are beginning to look up for United Parcel Service Inc. (UPS). By up, we mean the stock could rise 30% based on the $137 price target given by Bernstein analyst David Vernon, who is optimistic about the company’s recent agreement with the Teamsters labor union that he thinks will contribute to slower wage growth. While Vernon also likes FedEx, he warns that investor concerns over protectionism and tariffs are not without merit, according to Barron’s. 

   YTD Performance
 UPS  - 11.2%
 FedEx  - 8.8%
 S&P 500  + 1.5%

Turning Things Around

In recent negotiations with the Teamsters union, UPS secured a deal that would limit the number of hybrid drivers (i.e. drivers who also perform other duties) to 25% of the total amount of full-time carriers. That number is better than Vernon expected, allowing UPS to hire employees with more flexible roles and consequently gives the company greater flexibility in its cost structure. The deal also includes reductions to overtime and the cost of weekend operations, additional positive signs.

Consensus estimates for this year put the company’s revenue growth at 9.00%. With estimates for earnings growth at 20.6%, more than double that of revenue growth, analysts are expecting a slower rate of total cost growth. (To read more, see: UPS, FedEx to Outperform: Bernstein Analysts.)

Earlier this year, other analysts were also making optimistic predictions, arguing that the stock’s recent selloff was overdone. Stifel’s David Ross acknowledged UPS’s decision to increase capital spending after record package volume during the holiday season pushed handling costs higher and news about Amazon launching its own limited delivery service sent the stock tumbling. However, due to the strength in the market for packages and general freight, as well as expectations that Amazon will continue to be one of the company’s biggest customers, Ross believes the fears are overblown.

E-Commerce Challenges

As consumers increase the amount of shopping online versus shopping at retail outlets and malls, the number of packages per delivery-stop for package-delivery services is falling. That’s costly and is part of the reason why UPS has decided to increase capital spending, even though that increase spending is, in the opinion of Cowen analyst Helane Becker, likely to hurt its potential for profit margin expansion over the next couple of years, according to a separate article from Barron’s.

Other e-commerce challenges include competition from Amazon’s crowdsourcing delivery program, known as Flex, which uses nonprofessional couriers to pickup packages from warehouses and deliver them to the final customers. Vernon weighed in on this subject earlier this year, arguing that the constraints involved in building an efficient delivery service from a crowdsourced model would limit the damage done to traditional couriers like UPS and FedEx. (To read more, see: Bernstein: UPS, FedEx Safe From Amazon Flex.)

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