UPS shares to rise 25% from automation and price increases: Analyst

Key Points
  • Bank of America Merrill Lynch raises its rating to buy from neutral for UPS shares, predicting the company will cut costs.
  • UPS is going to detail its Network Transformation plan this year, and it is expected to include ongoing automation and a focus on improving margins, the bank's analyst writes.
A UPS facility in Chicago

United Parcel Service will announce a plan to improve its profitability through automation and price increases this year, according to Bank of America Merrill Lynch.

The bank raised its rating for UPS shares to buy from neutral, predicting the package delivery company will slash costs.

"UPS plans to launch its Network Transformation plan over the coming months, a plan which could focus on improving margins throughout the organization," analyst Ken Hoexter wrote in a note to clients Monday. The main points of the plan are expected to be the ongoing automation of UPS facilities and a recently announced voluntary management retirement program.

"A detailed plan could be a turning point for UPS much in the way FedEx's profit improvement plan in 2013," Hoexter wrote in the note.

UPS shares closed up nearly 1 percent Monday.

Hoexter raised his price target to $144 from $120, representing 25 percent upside from Friday's closing price.

The analyst said UPS' profit margins are declining due to "pressure from e-commerce growth," specifically citing its business with Amazon. Its online package segment requires fewer packages per shipment drop, has lower weight per delivery and has more seasonality, which hurts overall profitability for UPS.

"While UPS has not yet set a date for its forthcoming Analyst Day, we believe it is likely to focus on the company's plans to improve operating margins, particularly on its Domestic business," he wrote. "While the company's efforts to automate facilities should aid this effort, we believe it will also have to leverage pricing to improve margins. Both UPS and FedEx started to take steps in this direction this past holiday season with surcharges on difficult to handle packages."