By Sam Boughedda
On Tuesday, Wolfe Research analyst Scott Group downgraded United Parcel Service Inc (NYSE:UPS) from Peer Perform to Underperform as it moves to recession assumptions in their models for Transport stocks.
The analyst maintained a $167 price target on UPS in a broad note on the transport sector.
"While we don't see much EPS risk in 2Q, we’re materially lowering our C23 EPS estimates across the group today as we now forecast a recession in our models next year. Based on lower volumes, yields and margins, we forecast earnings to decline 18% on average y/y in C23. Our estimates are now 5%, 13% and 17% below Consensus on average for our Rail, Trucking, and Airfreight & Logistics sub-sectors in C23," wrote Group.
The analyst explained that transport stocks historically start outperforming at the onset of a recession.
"While we see clear EPS risk ahead, we'd expect multiples to start rising as estimates reset lower. If we apply multiples ~15% below historical 10-year averages to our C23 estimates that are 15% below Consensus, it still implies upside of about 5% on average for our stocks. So, risk/reward is starting to look a little more positive to us," explained Group, who added they are "downgrading UPS, EXPD and ODFL from Peer Perform to Underperform based on a mix of earnings and valuation risk."