According to Deutsche Bank analyst Amit Mehrotra, it's time to back up the truck on UPS stock.
Mehrotra has boosted the shares of the logistics giant. The stock was up more than 1% in premarket trading.
It's easy to be neutral or negative on UPS in the current environment, but in our experience that's the time to be more positive, especially under the stewardship of the current management team, Mehrotra wrote in a note to clients published Tuesday. We downgraded UPS shares to hold this time last year when we said that changing macro conditions and the upcoming labor contract negotiation were greater concerns to us in the context of a more than doubling of equity value since the start of the epidemic. We believe that concerns are now fully reflected in shares and are held by market participants, even though they were not at the time. Here are the details behind Deutsche Bank's upgrade:
Mehrotra says investors should focus their attention when looking at UPS' fundamentals in the near-term.
Market participants are too focused on volume growth and not on mix and productivity initiatives, which we think can drive positive revenue growth and solid contribution margins despite modestly lower domestic volumes. We think the upcoming teamsters contract negotiations will be more benign than expected, which is a sign of the cost of living adjustments COLA and market rate adjustments MRAs made to the current wage structure. In the third quarter and second half of 2022, we think there will be a chance for UPS to gain additional market share via time in transit. Mehrotra assigned a high grade to UPS CEO Carol Tome for driving a better business, which should yield strong results over time.
We are also encouraged by the impressive operating performance and potential for further productivity. It's no small feat to expand margins in a highly capital intensive business when volumes are down and costs are accelerating, which is what UPS did in the last three quarters. There are numerous levers to allow positive operating leverage. The company recently noted that a ten minute improvement within its integrated network is worth $257 million to the bottom line 25 basis points of the consolidated margin, which is a testament to the opportunity afforded by the company's scale. We are intrigued by the company's comments about attacking density challenges. You can follow Sozzi on Twitter and LinkedIn.