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Stocks  | July 15, 2019

Shares of FedEx were trading higher Wednesday morning, while United Parcel Service was slightly lower, after Goldman Sachs initiated coverage on both stocks with Buy ratings, arguing that the stocks have gotten too cheap and could rise 20% over the next 12 months.

The back story. The past year hasn’t been kind to the logistics giants. UPS (ticker: UPS) is up 4.3% in 2019 through Monday’s close, but is down just over 5.2% in the trailing 12-month period. FedEx (FDX) is down 1.3% and nearly 31% over the same periods. Both companies have had to contend with trade war issues and some lumpy earnings reports, as well as individual issues, such as FedEx’s decision to part ways with (AMZN).

What’s new. On Tuesday, Goldman Sachs analyst Jordan Alliger initiated coverage of the airfreight and logistics sector with Buy ratings on both UPS and FedEx (with FedEx placed on Goldman’s Conviction Buy list), as he sees more than 20% potential upside over the next year.

The catalysts that will get the stocks there, he said, include e-commerce, because as shipping times get squeezed, express companies—of which there are only 3 for small packages in the U.S., including the Postal Service—should see plenty of volume. Another is global trade, which will be a “critical driver for global logistics providers,” despite the current trade dispute. He also cited company self-help stories, such as network investments and automation.

Looking ahead. Alliger has a $200 price target on FedEx. Although the slower-than-expected integration of its TNT acquisition has been a drag on shares, he is confident that the synergies from that deal will be a long-term catalyst for firm. In addition, he thinks that “the ability to leverage its ground automation spend into margin expansion should enable FDX to regain its profit growth footing. He calls the valuation compelling, and a good entry point by historical standards.

For UPS, he thinks the firm will “leverage significant 2018-2020 capital investment into domestic profit improvement” after years of underinvestment. He likes the company’s long record of throwing off plenty of free cash, and again uses “compelling” to describe UPS’s multiple, at nearly two standard deviations below its 5-year average of 17 times. He has a $123 price target on the stock.

FedEx was up 1.2% to $161.07 Wednesday morning, while UPS was down 0.3% to $101.38. The S&P 500 was up 0.9%.

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