UPS gets rare call to sell amid increasing competition from Amazon and FedEx

(Bloomberg) — United Parcel Service Inc. received a rare sell recommendation as Barclays expressed concerns about the shipping giant's profits ahead of its third-quarter results later this week.

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Analyst Brandon Oglenski downgraded the Atlanta-based company to “underweight” from “equal weight,” citing likely near-term earnings risk from continued weakness in package demand, as well as longer-term challenges from a possible “smaller relationship” with Amazon.com Inc. and more competition from rival FedEx Corp.

“Long-term pressure from Amazon, non-union FedEx competition and limited dividend growth present a relatively difficult outlook for UPS shares,” Oglenski wrote in a note published Monday.

Shares of UPS fell 3.4% on Monday, marking their biggest single-day decline in nearly three months. Analysts tracked by Bloomberg currently have 17 corresponding buy recommendations, 14 hold recommendations, and three sell recommendations for the stock, with an average price target of $145. UPS shares are down 16% this year.

UPS's third-quarter earnings report on Thursday follows rival FedEx's disappointing report last month, which warned investors that business would slow in the coming year. Both companies have struggled with expedited shipping as more customers switch to slower delivery options to save money.

Oglenski believes Amazon remains a “threat” to UPS in the longer term, noting that the retail giant is the package company's largest customer. Given the size of Amazon's delivery network, which rivals that of UPS, the analyst said Amazon's potential volume loss will be a major overhang for the stock in the coming years.

“As UPS seeks stronger domestic profitability in the U.S., pricing will likely be an important factor for management, but also a major incentive for Amazon to develop long-term solutions to integrate larger volumes of UPS into the company's large delivery network said Oglenski.

FedEx also poses a long-term challenge for UPS. Oglenski noted that the merger of express and ground services brings risks that could limit the value of UPS shares.

“Investors should consider future competition from a combined non-union operation of FedEx US Express and Ground, which could potentially compete with or exceed UPS's productivity, which is constrained on a relative basis by union work rules and contractual wages and benefits.” he added.

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