Amazon Air-Warehouse, Trump Effect Create An Overhang For UPS Shares

As one of the largest customers of United Parcel Service, Inc. UPS, Amazon.com, Inc. AMZN could put a sizeable dent in UPS shipments with its upcoming package air hub. Due to impending diversion of packages from the UPS stream, Loop Capital Markets lowered its company price target Monday from $124 to $116.

Rating, Justification And Commentary

“While the 'how much' and 'by when' is largely guesswork, what is just as worrisome to us is the impact on UPS in terms of sentiment and valuation, which is more immediate,” analyst Rick Paterson wrote in a Loop Capital note.

Paterson said UPS has traded at a premium since 2005, when its P/E rating fell from the mid-20s to the high-teens. The future of that premium status is now in question, and 2017 could prove to be a “reality check.”

The most ominous conditions are Amazon’s imminent shift from UPS customer to market competitor, government trade restrictions and increased tariffs: “a $400-million FX headwind and negative mix shift towards lower margin B2C packages.”

Based on these circumstances, Loop Capital maintains a Hold rating on UPS. Risks include changes to anticipated trade regulation, possible rises in fuel prices and shipping charges, competition from FedEx Corporation FDX and extreme weather activity.

UPS shares were trading near $106 at the time of publication.

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