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UPS upgraded by Stifel ahead of expected holiday shipping crunch

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Amid a strained period for supply chains across the country, UPS looks like a bright spot for investors, according to a new note from Stifel.

Stifel upgraded the stock from Hold to Buy, noting that "there's a lot to like about the fundamental UPS story right now," raising its target price to $224.

"I'd say that UPS is in the best position or at least one of the best positions" amid the holiday shopping season, Stifel's Bruce Chan said on Yahoo Finance Live.

"When you're looking at the kind of supply-chain disruptions and backlogs as we are right now, there are a lot of shippers out there that really need to move product and they need to move it right away, and the way you do that is through high speed, high service networks, which of course, UPS is one," said Chan. 

And "the big shippers out there ... if they're trying to get products on store shelves before the holiday season, they're probably not looking to do so via slow boat, literally," he added.

UPS World Services Boeing 767-34AF(ER) N325UP  descends into East Midlands Airport, Derby, England, on August 26, 2020  from Philadelphia. (Photo by Jon Hobley/MI News/NurPhoto via Getty Images)
UPS World Services Boeing 767-34AF(ER) N325UP descends into East Midlands Airport, Derby, England, on August 26, 2020 from Philadelphia. (Photo by Jon Hobley/MI News/NurPhoto via Getty Images)

UPS is a 'highly quality company'

The supply chain system has taken a massive hit, as container ships remain offshore, ensnared by delays. Analysts are expecting tightness to persist well into next and following year.

"We expect ... strained supply chains to last until the early parts of 2023," Peter Sand, chief shipping analyst at Copenhagen-based BIMCO, a shipping trade group, told Yahoo Finance Live in an earlier interview. "We are basically seeing a global all-but-breakdown of the supply chains from from end to end."

But given this backdrop, not only is UPS positioned to do well, it's also likely to perform a lot stronger than FedEx (FDX) because the latter has had issues with labor, said Chan.

"They've got a lot of labor throughput issues right now, that's a function of where they are, we think in their ground hub automation investment cycle, and also due to some of the peculiarities of their non-union labor force," said Chan.

"UPS has a higher labor cost structure with their teams ... but that also means that their employees have been seeing steady wage increases over the last several years," he added, "and that's helped the company to attract the labor that it needs to service the demand that we're seeing right now."

According to Stifel's note, UPS continues to drive secular volume growth in its core small package unit, and "continued yield management focus is a boon in an environment with ample near term rate momentum." 

Additionally, being disciplined about capital allocation has also "helped set the company up to deliver in an extremely tight operating environment—one in which FedEx is likely to struggle more acutely for a quarter or two," the analysts added. 

Ultimately, "We think UPS is not subject to the same types of pressures that FedEx is right now," said Chan. "Investors should have a good opportunity to own a very high quality company here."

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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