UPS Price Target Raised By Wells Fargo, Sighting A Significant Growth

Wells Fargo believes that the earning growth potential of United Parcel Service is underappreciated by investors.

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Analyst Allison Poliniak-Cusic reiterated her overweight rating on package delivery stock and raised her target price to $221 from $195. An upside of roughly 20% is implied by the new target.

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"UPS is making substantial investments in 2023," Poliniak-Cusic said in a note to clients on Friday. “There is a chance that those investment headwinds will not only fade in 2024 but that they will also generate incremental profits as well."

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It is expected that UPS will announce its cost-saving plans later this year. These plans, when combined with investments into the company's accretive growth expected to accelerate in the second half of the year, are likely to be positive catalysts for the business in the second half of the year and bolster optimism for the year 2024.

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Investment headwinds will also fade away in 2024, allowing the company to start generating incremental profits in 2025. It is estimated that, as a result of this move, the EBIT for the company will increase by more than $1 billion in 2024, according to the consensus model. There is a possibility that volume growth could provide additional gains, implying that there may be a tailwind that is underappreciated.

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Through the year 2024, the firm estimates that receding costs can boost the company's bottom line by as much as $2.30 per share due to the decrease in costs. There has been priced in a $1 billion headwind due to a "placeholder" overhang in labor contact, but she cautioned it could change at any time.

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Poliniak-Cusic said that the company could see an upside sooner than 2024, despite earnings growth being mostly a 2024 story.

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There are still some potential challenges to that story, however. In addition, Poliniak-Cusic said UPS has gained a reputation for being able to execute company changes efficiently, but the extent of the gains from productivity changes are uncertain since they rely on how much the incremental volume increases from the previous period.

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However, she also emphasized the fact that productivity improvement can be a source of downside support and create a positive operating leverage, which can be used to accelerate profit growth during a period of recovery.

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Since the beginning of the year, the stock has gained 6.2%, a turnaround from the 18.9% loss it suffered last year.