MW UPS could help end the 'freight recession' this year. It may have to raise prices to get there.

By Bill Peters

BofA analysts say deregulation, lower taxes under Trump could spur small-business investments and more shipments - but tariffs could weigh down volumes

After some three years of weaker demand for package deliveries, the "freight recession" that has weighed on companies like United Parcel Service Inc. and FedEx Corp. could end this year on improving sentiment and potential deregulation, BofA analysts said Thursday.

As that momentum builds, the analysts upgraded UPS $(UPS)$ to a buy rating from their version of a hold - as cost cuts, dynamic pricing and other possible rate increases aid its bottom line, even as businesses and consumers continue to juggle higher costs. BofA kept its $150 price target on the stock.

Shares of UPS were up 2.3% on Thursday. FedEx's $(FDX)$ stock was down fractionally.

The analysts upgraded UPS after a spike in prices for basics in 2022, particularly following Russia's invasion of Ukraine, forced many shoppers to prioritize purchases for necessities like food and essential services. Demand for online purchases that need to be shipped suffered, and consumer caution led to business caution.

FedEx, at times, has called out slower industrial production around the world, and it has tried to cut billions in costs while scaling back staff and operations. UPS has similarly pursued plans to let go of employees, close facilities and push automation, the BofA analysts noted.

Those analysts, led by Ken Hoexter, said in a note Thursday that their own proprietary truck-demand indicator currently stood at its highest level in three years. They also noted that some spot shipping rates have been up for 25 straight weeks.

That trend, they said, signals broader strength, rather than any increases from disruptions like port strikes on the East Coast, harsh weather or efforts to get more items shipped ahead of any new tariffs under President-elect Donald Trump.

"Additionally, President-elect Trump's deregulatory proposals and lower corporate tax policies could spur small- to medium-sized $(SMID)$ business investments, driving additional freight flows," the analysts said. "Alternatively, we could see volume gains stall on increased tariffs, depending on breadth and level implemented."

For UPS, they said in a separate note, efforts to raise rates on mega-discounter Temu and fast-fashion giant Shein, along with "more aggressive" dynamic pricing that changes more quickly with demand, would help profits and offset costs from its labor deal with the Teamsters union in 2023.

"UPS has launched more aggressive dynamic pricing, including raising rates for low-value Chinese e-comm sellers (Temu and SHEIN) beginning in 4Q24," the analysts said.

"Results should be aided by improving freight activity, as we target domestic volumes to grow for the third consecutive quarter after declining in 11 of the prior 12 quarters," they added. "Its cost cutting and yield focus should enable domestic operating margin to reach its near 10% goal by year-end (we target 9.5% for 4Q24)."

The analysts also said UPS would likely raise shipping prices to counter the effects from the end of a service agreement with the U.S. Postal Service, as reported by other news outlets.

Under that arrangement, the analysts noted, the postal service handled the final mile of delivery for some of UPS's lightweight packages, which didn't make a lot of money for the company. This month, UPS said it would be handling those shipments itself.

Shares of UPS are down 17% over the past 12 months.

-Bill Peters

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January 16, 2025 13:36 ET (18:36 GMT)

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