By Tomi Kilgore, MarketWatch
Shares of United Parcel Service Inc. rallied Tuesday, in the face of a broader stock market selloff, after Deutsche Bank analyst Amit Mehrotra turned bullish, saying they now appear to be “fully de-risked.”
Mehrotra raised his rating to buy from hold. He kept the stock price target at $119, which is about 26% above current levels.
The package delivery giant’s stock /zigman2/quotes/201245396/composite UPS +3.34% rose 0.9% in midday trading, to extend the bounce off last week’s 14-month low. It has now gained 3.7% over the past three days. The rally started after a six-day, 15.5% tumble to the Feb. 27 close of $90.49, which was the lowest close since Dec. 24, 2018, amid concerns over the potential negative impact of the coronavirus outbreak.
The rally comes while the Dow Jones Transportation Average /zigman2/quotes/210598063/realtime DJT +3.11% fell 0.1% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +3.15% fell 250 points, or 0.9%.
Mehrotra said after last week’s selloff, UPS’s stock appeared to be pricing in a 30% reduction in earnings power.
“In this context, shares appear fully de-risked, especially when overlaying its 4.4% dividend yield,” Mehrotra wrote in a note to clients.
Based on the annual dividend rate of $4.04, the implied a dividend yield at current prices is 4.33%, which compares with the implied dividend yield for the S&P 500 index /zigman2/quotes/210599714/realtime SPX +2.62% of 2.00% and the yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% of 1.035%. See Bond Report.
Mehrotra said the spread between UPS’s dividend yield and the 10-year Treasury yield at about 330 basis points (3.3 percentage points), has never been wider. The average spread since 2015 has been about 90 basis points.
“At the risk of stating the obvious, we don’t know how coronavirus will evolve; but we do know that periods of difficulty and challenge can create dislocations and long-term opportunity,” Mehrotra wrote in a note to clients.“In this context, we view UPS as one of the most compelling ideas in our coverage following the recent correction, and forecast significant upside as focus eventually moves from transitory headwinds to structural earnings power, with the above-mentioned dividend yield providing strong support for equity value.”
In comparison, shares of rival FedEx Corp. /zigman2/quotes/203047719/composite FDX +2.16% have declined 2.1% over the past three days, after falling 13.9% the previous six sessions. FedEx’s dividend rate of $2.60 implies a dividend yield of 1.91%.
See related : UPS has a new risk factor: Amazon.
Year to date, UPS shares have tumbled 20.0% while the Dow transports has shed 13.7% and the Dow industrials has lost 7.7%.