Buy or Sell UPS? Here Are the Arguments

UPS shares took a big hit on Tuesday, after posting lower-than-expected quarterly earnings and cutting its full-year outlook amid an economic slowdown.

UPS truck & driver
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UPS truck & driver

While most agree the 105 year old company, which moves millions of packages between consumers and businesses every day, can survive a weaker economy, analysts disagree over whether investors will soon see returns.

"They don't expect the traditional fall restocking we normally get in August and September in the U.S.," said Jeffrey Kauffman, managing director at Sterne Agee, who has a "buy" rating and $110 price target on UPS.

Kauffman argues that taking down the full-year forecast was a smart, protective move while businesses cut back.

"They're getting out ahead of the curve and saying listen, we'll take down our capacity, batten down the hatches. But they are still throwing off almost $3 a share in free cash flow and their earnings growth is still going to be pretty strong," Kauffman told CNBC's "Squawk on the Street."

Kauffman expects UPS to post stronger profits as it heads into the fourth quarter, which is also when the company expects to close on its biggest takeover in its history, the purchase of Dutch company TNT Express. Kauffman predicts the acquisition will start adding to earnings by 2013.

But Donald Broughton, analyst at Avondale Partners, disagrees, citing acquisition risk as one of the main reasons he thinks UPS is a "sell."

Broughton downgraded UPS ahead of its earnings release, and currently has a $65 price target.

"The acquisition of TNT will essentially double their exposure to Europe," said Broughton in a separate interview. UPS's international package business in Europe currently represents about 14 percent of their revenues.

"Volume in Europe was down over 3 percent (last quarter), and pricing was down over 5 percent," he added. "You just can't face those kind of headwinds and still bring the bottom line number home."

The company's valuation (nearly 16 times forward earnings) is another problem, Broughton argued.

"We're seeing the stock trade at a bigger premium in valuation to FedEx and the S&P 500than we've seen in quite some time," said Broughton. "We think that's unwarranted, given the headwinds it's facing."

—By’s Jennifer Leigh Parker

Additional News: UPS Profit, Revenue Miss Estimates
Additional Views: Why UPS Failed to Deliver

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Jeffrey Kauffman does not personally own shares of UPS, but his firm, Sterne Agee has UPS as an investment banking client. Sterne Agee also makes a market (matched buyers and sellers) in UPS securities. Neither Donald Broughton nor his firm Avondale own shares of UPS.


Follow Jennifer Leigh Parker on Twitter @jparker741.