Don’t buy UPS shares until it figures out its relationship with Amazon: Deutsche Bank - CNBC News

Don’t buy UPS shares until it figures out its relationship with Amazon: Deutsche Bank

Deutsche Bank lowers its rating for UPS shares to hold from buy, citing the company's difficulties in handling surging e-commerce delivery volumes from Amazon.

The firm's analyst is concerned the company will have to invest more in its delivery infrastructure.

Tae Kim | @firstadopter

Published 23/2/2018

CNBC.com

Chief Executive Officer of Amazon, Jeff Bezos, tours the facility at the grand opening of the Amazon Spheres, in Seattle, Washington on January 29, 2018.

Jason Redmond | AFP | Getty Images

Chief Executive Officer of Amazon, Jeff Bezos, tours the facility at the grand opening of the Amazon Spheres, in Seattle, Washington on January 29, 2018.

UPS' difficulties in handling surging e-commerce delivery volumes from Amazon is a problem, according to one Wall Street firm.

Deutsche Bank lowered its rating for UPS shares to hold from buy, saying the company will have to invest more in its delivery infrastructure due to rising online sales.

"We have reduced confidence in UPS' ability to control burgeoning capex, with capital intensity expectations more than doubling as a % of sales in just the last 12mo," analyst Amit Mehrotra wrote in a note to clients Thursday. "We see a lack of positive catalysts to justify a Buy rating. UPS shares won't start working in our view until mgmt. can articulate a sound strategy to strike the right balance between price and volumes vis-à-vis Amazon, and talk more concretely about the long-term/structural capital needs of the business as mgmt. 'leans in' to higher B2C shipments."

UPS shares declined 0.3 percent in Friday's premarket session after the report.

Mehrotra noted UPS had "significant underinvestment" in building its delivery capability over past decade amid surging e-commerce package volumes.

As a result, the analyst reduced his price target for UPS shares to $115 from $135, representing 9 percent upside to Thursday's close.

UPS shares are underperforming the market this year as investors are concerned Amazon may compete more aggressively in the delivery business. The company's stock is down 12 percent year-to-date through Thursday versus the S&P 500's 1 percent gain.

The Wall Street Journal reported on Feb. 9 Amazon is gearing up to launch a delivery service for businesses.

An UPS spokesperson sent the following statement when asked for comment on the report:

"We don't comment on third party discussions about UPS stock. UPS business strategies have yielded strong growth and industry leading return on invested capital. We are in the midst of a significant investment program designed to further enhance the capacity, capability and efficiency of the UPS network and the overall business. UPS tallied 8% revenue growth in 2017, very strong revenue per piece and annual pricing at 2.9%, which is at the high end of our normal range of 2-3%. There is tremendous opportunity in the B2C market and more growth coming to the sector and UPS, irrespective of how other companies shift strategies."