FedEX, UPS Among Goldman's Recommendations Ahead Of Peak Freight Season

Cross-border e-commerce growth and the coming peak holiday season are materializing as key catalysts for shipping freight companies United Parcel Service, Inc. UPS and FedEx Corporation FDX, according to a new report from Goldman Sachs.

The Analyst

Goldman Sach’s Matt Reustle.

The Rating:

Goldman Sachs initiated coverage on FedEx with a Buy rating and $270 price target. The firm initiated coverage on UPS with a Buy and $148 price target.

The FedEx Thesis

Goldman Sachs is bullish on FedEx and UPS heading into the peak season.

FedEx's earnings have upside potential, Reustle said, adding that he's encouraged by the shipping company's ability to manage costs, estimating that FedEx has closed the margin gap against UPS from 500 basis points to 300 basis points in recent years.

“We believe that the upcoming peak season and ongoing restoration of the TNT systems are catalysts for FDX shares. While FY18 likely carries noise from TNT integration, we estimate FDX will meet its [greater than 10 percent] EPS growth and 10 percent-plus operating margins in FY19,” said Reustle.

The analyst said he's confident the addition of TNT systems will drive future international growth, and said cross-border e-commerce is becoming an increasingly larger part of the business.

The UPS Thesis

Cross-border e-commerce is an underappreciated but important catalyst for UPS investors in 2018, according to Goldman Sachs.

Only 36 percent of US retailers are selling cross-border, meaning most merchants are only selling to 5 percent of the global population, Reustle said. As e-commerce technology and logistics continue to improve, expect these numbers to change dramatically over the years, the analyst said.

“We believe cross-border e-commerce could represent over 50 percent earnings upside for UPS through the end of the decade."

The biggest catalyst for UPS remains the peak holiday season, but Reustle thinks the conversation will shift toward international growth heading into 2018. As a result, Goldman Sachs prefers UPS over FedEx in the near term and added UPS to its Americas Conviction List.