Wall Street analysts are divided over UPS (UPS 0.47%). While several of them lowered their price targets on the stock after the company's recent Investor and Analyst Day presentation, Redburn Atlantic analyst Oliver Holmes raised his rating to "buy" from "neutral" with a $180 price target. That would represent an 18% gain from its current price. Let's consider the thinking behind this view.
An analyst upgrade for UPS
According to Thefly.com, Holmes argues that UPS is nearing a trough in key metrics, including volume and margin. Indeed, UPS management believes its volume growth will turn positive sometime in the second quarter and then improve throughout the year.
In addition, its 2026 targets make the stock look attractive, mainly due to underlying improvements in the company's focus areas, like small and medium-sized businesses and healthcare on the revenue side. Meanwhile, on the cost side, investments in technology and site consolidations should control labor costs and improve productivity.
In addition, UPS has a growth opportunity coming from winning back customers lost last year due to a protracted labor dispute – many customers diverted volumes in fear of a strike.
A potential issue for UPS
While I agree with the analyst's thinking, a concern causes me to be slightly cautious about the stock. As discussed previously, CFO Brian Newman's update on first-quarter earnings expectations -- adjusted operating profit is expected to decline by 40% -- leaves the company with much to do to make its implied first-half guidance.
Moreover, management is relying on increases in revenue per piece in an industry that is currently in a state where supply exceeds demand. As such, cautious investors will want to hear what management says about its full-year 2024 guidance when it gives its first-quarter earnings on April 23.
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The last thing investors will want to hear is that UPS is struggling to meet its full-year 2024 guidance, as it will also call into question its three-year targets. On a more positive note, if management does confirm it's on track to meet the targets and volumes are already or are about to turn positive on a year-over-year basis, then don't be surprised if the stock moves higher in late April.
