Stifel Nicolaus downgraded United Parcel Servicein a research note on Tuesday, saying the company’s upside potential is limited in the near-term due to its impending merger with TNT Express.
“With a large merger on the horizon, we no longer view UPS as low-risk as we had last week and therefore require more upside potential to justify a Buy rating,” the report said about the world’s largest package delivery company.
Still, the report said the TNT merger, which was announced on Monday, could be a long-term positive.
“We prefer the cleaner FedEx... earnings story, as a global trade recovery (and market consolidation) without any integration headaches should allow its pricing power and margin expansion to continue for the next couple of years,” analysts said.
Although Stifel Nicolaus analysts placed a “hold” rating on UPS, they acknowledged that the shipping company could still trade higher this year due to potentially good first-quarter results and an improving global economy. If that occurs, the firm said it would take that opportunity to lighten its positions ahead of the TNTdeal’s closing, which is expected in the third quarter.
The report’s analysts said they were cautious on the merger because large-scale network integrations often begin with more potential benefit than ultimately is realized. Furthermore, they said that “UPS management does not have a stellar track record, in our opinion, navigating sizable integrations as planned … or realizing estimated annual cost-savings benefits.”
Analysts see several risks in the impending merger, such as if “IT/network/labor integration and/or management distraction causes market share losses to competitors and/or margin compression, TNT operating performance does not improve or worsens (or the) European Commission finds merger anti-competitive in one or more areas.”
Without any year-over-year improvement in TNT’s business or operating ratio, Stifel Nicolaus expects the deal to be 2 percent accretive. But if the Street’s current estimates come to fruition, the deal would be between 5 percent to 6 percent accretive to earnings per share.
Analysts see several potential “synergy” benefits in the merger. It could result in headcount reductions and greater density in UPS-owned aircraft. By 2017, the deal could result in annual pre-tax cost savings of $525 to $725 million, according to UPS management.
Still, analysts said they “believe network integration synergies are almost as hard to attain as they are to estimate.” During the next four years, the company anticipates about $1.3 billion in integration costs but did not give a timetable for them.
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Disclosures:
Stifel Nicolaus expects to receive or intends to seek compensation for investment banking services from UPS and FDX in the next three months. Stifel Nicolaus makes a market in the securities of UPS and FDX.
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