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On Jul 5, we maintained our Neutral recommendation on United Parcel Service Inc. (UPS - Analyst Report). The company’s improved business-to-customer (B2C) services, rate hikes, planned investment program and profitable alliances bear evidence to its strength.  However, several headwinds could impede its operating results going forward. This transportation and logistics service provider holds a Zacks Rank #3 (Hold).

Why Maintained?

We believe that United Parcel stands tall with a focused approach towards expansion, various strategic measures, collaborations with other leading firms, a well-defined business model and constant technology upgrades. The company’s policy of increasing freight and general rates on a regular basis remains a key driver for yield expansion in the current market scenario.

United Parcel is targeting to tap the growing opportunities in the health care business sector. With distribution units dedicated to health care in the key markets of North and South America, the company now plans to open health care distribution facilities in the emerging markets of China, India and Japan. To fortify its presence in Europe, United Parcel is set to acquire Hungary-based pharmaceutical logistics company CEMELOG Zrt.

To foster growth, United Parcel aims to invest about $500 million toward new technology and facility expansion over the next few years in markets including France, Latin America, Vietnam, China, and Korea. Additionally, the company launched a new shipment monitoring and risk management solution – UPS Proactive Response (TM) Secure. We also appreciate the company’s efforts to enhance shareholder returns through higher dividends and share buybacks.

Nevertheless, we remain skeptical about United Parcel’s near-term performance due to labor unionization issues, various market risks, high pension expenses and competitive threats from Expeditors International of Washington Inc. (EXPD - Analyst Report) and CH Robinson Worldwide Inc. (CHRW - Analyst Report).

The second and third quarters of 2013 have the Zacks Consensus Estimate for earnings pegged at $1.19 and $1.24 per share, respectively. This reflects year-over-year growth of 3.8% for the next quarter and 16.5% for the third.

Other Stocks

Companies operating within the transportation sector that are worth taking note of include Zacks Ranked #2 (Buy) Kansas City Southern (KSU - Analyst Report).

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