United Parcel Service could benefit from lower interest rates as inflation eases, according to BMO Capital Markets. Analyst Fadi Chamoun upgraded shares to outperform from market perform. He did trim his price target to $150 from $155, but the new forecast still implies upside of nearly 17% from Monday’s close. “After nearly two years of soft B2B demand environment, we expect lower interest rates and a potentially recovering industrial economy to support a return to low single-digit growth in B2B volumes,” Chamoun said in a note. The Federal Reserve began lowering rates earlier this year. The U.S. central bank is expected to cut rates again next week by 0.25 percentage point, as inflation approaches the Fed’s 2% goal. UPS YTD mountain UPS in 2024 Inflationary pressures on UPS’ unit costs are also easing, per Chamoun. The company has a roster of productivity initiatives, such as the Network of the Future Plan, which alone is expected to net $3 billion in cost savings by 2028. Chamoun thinks that the company’s operating margins and return on invested capital also look to improve as it reinvests more services such as health care logistics. This is one of the company’s higher-value-added logistics services, noted the analyst. The stock is trading cheap compared to its historical levels, said Chamoun. “UPS valuation is near historical low levels, which we think offers a positive risk/reward in light of the projected free cash flow to EBITDA conversion of ~40% (in line with the historical 10-year average —which is amongst the highest in Transports and with solid [return on invested capital] profile as well,” Chamoun said. “The 5% dividend yield is, in our opinion, the icing on the cake,” he added. Shares jumped more than 2% Tuesday before the bell. Year to date, the stock is down 18.3%. Analyst sentiment is mixed on the stock. Of the 32 who cover UPS, 15 have a buy or strong buy rating, while another 14 rate it as a hold, according to LSEG data. Three others have it as underperform.
