UPS Faces Post-SurePost Challenges: Analyst Sees Long-Term Gain But Near-Term Hurdles

United Parcel Service, Inc. UPS shares are trading lower on Thursday.

JP Morgan analyst Brian P. Ossenbeck reiterated the Neutral rating on United Parcel Service, Inc. UPS.

The analyst notes that the contract between UPS and the United States Postal Service (USPS) for SurePost expired on December 31, 2024, and it seems the two companies did not reach a new agreement.

This is separate from the air cargo contract UPS secured with FedEx Corporation FDX in 2024.

Ossenbeck views the situation as a long-term positive for UPS and parcel pricing, but questions how well the company can handle the transition of SurePost volume immediately after peak season, given that FedEx estimated a similar transition would take about a year. The analyst reiterated the Overweight rating on FedEx.

The analyst suggests that UPS may be following a similar strategy to FedEx, which in-sourced its SmartPost service to save on USPS delivery fees and improve cost efficiency.

The analyst expects UPS to discuss the strategic rationale and financial implications in the fourth-quarter earnings call on January 30.

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At the time, FedEx was also aiming for a seven-day residential delivery network, which has since been scaled back.

Ossenbeck acknowledges UPS could handle the added volume under a new brand (possibly “Ground Saver”), eventually reducing service areas it cannot reach.

The analyst has previously emphasized that parcel carriers need to get “Better and Smaller,” and views this as a positive first step, though he doesn’t expect significant delivery density improvements, as even during the COVID-19 boom, those benefits were not realized.

Ossenbeck highlights potential execution risks for UPS, including package car capacity constraints and challenges in integrating SurePost during peak return periods.

There is also uncertainty about whether the recent Teamsters’ contract limits SurePost deliveries, as drivers have previously focused on larger packages for redirection.

For FedEx, the analyst suggests that its Ground Economy service could benefit if United Parcel and USPS continue to raise rates for the most economical delivery services, thus increasing the price floor for deferred products.

Price Action: UPS shares are trading lower by 2.86% to $123.14 at last check Friday, while FDX shares are trading lower by 1.24% to $271.40.

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