(By Balachander) United Parcel Service Inc. (NYSE:UPS) shares were downgraded to "Hold" from "Buy" by Deutsche Bank analyst Justin Yagerman, who cited accelerating uncertainty in Europe and an expected deceleration in share buybacks.
Yagerman, who reduced his price target on the stock to $82 from $88, lowered 2012-13 EPS estimates to $4.68 and $5.30, respectively, from $4.81 and $5.46 due to a moderation in his share buyback expectations as well as further deterioration in International Package volumes and slower economic growth.
"Although we remain impressed with UPS's expansive network, industry-leading returns, and shareholder-friendly attributes (paying out the majority of net income in the form of dividends and share buybacks), we believe shares are now fairly valued," Yagerman wrote in a note.
As a result of UPS' larger exposure to Europe (roughly 50 percent of International Package revenue), Yagerman believes slower European growth, a weaker euro, and heightened uncertainty in the region will likely constrain share performance.
The analyst expects share buybacks to remain around $1.5 billion over the next two years.
Given UPS' current premium to both FDX (30 percent vs. a five-year average of premium of 15 percent) and the S&P 500 (23 percent admittedly below its a five-year average of 26 percent), the analyst believes increased uncertainty in the Eurozone may drive relative underperformance.
"While we continue to like UPS' growth potential, its strong free cash flow generation, and expansive footprint, we believe a more attractive entry point will emerge over the coming months," Yagerman said.
On Monday, shares were off 0.81 percent to trade at $78.12. In the 52-week period, the stock has been trading between $60.74 and $81.79.