UPS deal may help maintain momentum

By: | at 08:00 PM | Intermodal  

United Parcel Service Inc. plans to steer around a slump by thinking bigger. Since going public in 1999 at $50 a share, 98-year old UPS has fought to keep hold of its dominant position in the shipping business.

The Atlanta company plans to purchase trucking concern Overnite Corp. for $1.25 billion, broadening its business beyond shipping small packages, as rivals such as FedEx Corp., DHL Americas and the US Postal Service chip away at market share.

UPS shareholders historically have been well rewarded, though the stock lately has been volatile. UPS steadily climbed to an all-time high of $87.70 on Dec. 19 before dipping to a 52-week low of $66.65 on April 22 - its lowest point since late 2003.

It closed Tuesday at $73.92, a price realm some analysts think is too rich. The bulls on Wall Street say the Overnite deal could help UPS maintain its momentum. The bears are skeptical of Big Brown’s growth projections and see potential labor union problems down the road.

The “Bull” case

Overnight Change: The Overnite Corp. deal - UPS’s largest ever - places the company among other “less-than-truckload,” or LTL, carriers.

“We view this as a very positive transaction, filling out UPS’s domestic ground portfolio,” writes Jon Langenfeld, an analyst at Robert W. Baird who rates UPS at “outperform” with an $89 price target. “We believe UPS can leverage its brand to eventually become a premier LTL provider, similar to how FedEx leveraged its name with FDX Freight.”

The price for Overnite, while expensive at a 46% premium, was fair since UPS “fills a missing service offering in its portfolio” writes Ken Hoexter at Merrill Lynch, who has a “buy” rating and $84 target.

Driving Growth: At its recent investor conference in New York, UPS said volume through the first five weeks of the second quarter is tracking “well ahead” of the 2% guidance offered in late April. Smith Barney notes that management cited “greater traction with midsized customers” and the rollout of technology to help drivers efficiently plan trips that could shave between $50 million and $100 million in costs.

“Management remains confident that the company can maintain its leading domestic package market-share position, while faster-than-market growth can be anticipated in both Asia and Europe,” Smith Barney analyst Scott Flower writes.

Baird estimates global air cargo and domestic package volume should rise four to six percent annually over the long term.

Tortoise and Hare: UPS fashions itself as a hare when delivering packages, but is a tortoise when it comes to earnings growth - and “slow and steady” wins the race when it comes to earnings, Flower writes.

He says UPS consistently delivers on earnings and is able to hedge against the impact of a fluctuating US dollar. Flower, who has a “buy” rating and $90 price target, calls UPS “the preeminent player in the parcel-delivery sector” and among the lowest-volatility names in the Standard & Poor’s 500-stock index.

The “Bear” case

Teamster Trouble: Overnite was spun off in 2003 from Union Pacific, a railroad giant that won a three-year labor battle against the Teamsters that eventually led to the ouster of the union from Overnite. The union, though, represents most UPS drivers, and could try its hand again at Overnite.

“We find a bit of irony in the acquisition of Overnite by the heavily unionized UPS,” writes Donald Broughton at A.G. Edwards.

The analyst, who rates UPS a “hold,” thinks the Teamsters will succeed at unionizing Overnite, an “immediate cost headwind” for UPS that could lead to higher wages.

Legg Mason says it appears UPS didn’t make a formal deal with the Teamsters regarding adding Overnite to the fold. That could lead to trouble down the road if there is overlap between union and nonunion workers resulting in a reduction in Teamster jobs. The UPS-Teamsters contract is up for renewal in 2008.

Shipping Blues

FedEx, DHL Americas and the US Postal Service have chipped away at market share. The Internet also is luring away


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