A Citigroup analyst recently lowered the company's price target on United Parcel Service (UPS -0.31%) stock from $158 to $149 and maintained a buy rating on it. The price target cut isn't great news, but it still represents a 32% premium to the current price, indicating that the recent sell-off is a buying opportunity.
Here's why.
The stock sold off after the fourth-quarter earnings presentation at the end of January. There was nothing wrong with the numbers, but the market took exception to the announcement that UPS had agreed with its largest customer, Amazon (AMZN -3.65%), to reduce deliveries for the e-commerce giant by at least 50% by the second half of 2026. Amazon deliveries accounted for 11.8% of UPS revenue in 2024.
That's going to reduce revenue over the near term. Indeed, management's guidance for 2025 revenue is $89 billion compared to $91.1 billion in 2024, but if margins expand as expected due to the change, then the company's adjusted operating profit will grow by about 8%.
Clearly, the market is worried about execution risk because UPS needs to significantly restructure its network to accommodate the reduction in Amazon volume.
As the Citi analyst notes, the change creates a significant opportunity to replace low- or even zero-margin Amazon deliveries (notably the difficult deliveries to residential addresses) with the higher-margin deliveries in end markets (like the healthcare sector and small and medium-size businesses) that UPS is targeting for growth.
This argument makes perfect sense and aligns with the company's "better not bigger" framework for maximizing the profitability of its deliveries rather than chasing volume growth. In this context, its relationship with Amazon has always somewhat been out of sync with its underlying objectives.
As such, investors should welcome the change but also monitor the company's progress in executing the plan. Given that the stock trades at slightly more than 14 times analyst expectations for earnings in 2025, the Citi price target looks reasonable.
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