BofA cuts UPS, FedEx ratings, citing de minimis volume and cost pressures

Bank of America downgraded UPS to Underperform and FedEx to Neutral, citing significant pressure on volumes and costs following the recent end of 'de minimis' exemptions for international shipments, which affected approximately 4 million packages daily. This policy shift, impacting 16-17% of their revenues, has already caused a 34.8% decline in UPS's US-China trade lane volumes and is projected to lead to a muted 2025 air peak season. Coupled with UPS's reduction in Amazon volumes, BofA consequently cut both carriers' EPS estimates and price targets, emphasizing structural volume declines and slower cost reductions as key near-term vulnerabilities.

Analysis

Bank of America has downgraded United Parcel Service (UPS) to Underperform and FedEx (FDX) to Neutral, citing significant structural headwinds from the termination of 'de minimis' trade exemptions. This policy change affects an estimated 4 million packages daily, impacting segments that constitute 16% of UPS's and 17% of FedEx's revenues. The immediate impact is evident in UPS's May/June average daily volumes on its profitable US-China trade lane, which fell 34.8% year-over-year. BofA projects this will lead to a 'muted air peak season in ’25', as prior peak strength was driven by Chinese e-commerce leveraging the now-closed loophole. The situation for UPS is compounded by its decision to shed half of its Amazon volumes, which represent 11% of its revenue. Consequently, BofA has reduced its forward EPS estimates for both carriers, cutting UPS's 2025 EPS by 3% and FDX's 2026 EPS by 6%, with new price targets of $83 for UPS and $240 for FDX. The core thesis is that structural volume declines, combined with a lag in cost-reduction efforts, have increased near-term earnings vulnerability for both logistics giants.

Key Decisions for Investors

• Investors should re-evaluate exposure to UPS and FedEx given the structural volume headwinds from the 'de minimis' policy change, which has prompted significant downward EPS revisions and price target cuts.
• Particular caution is warranted for UPS, as it faces the dual pressures of the regulatory change on its most profitable trade lane and the concurrent, substantial reduction in its Amazon-related business.
• Monitor upcoming quarterly reports for specific data on international volumes and management commentary on cost-cutting progress, as these are the key factors that could counter the current negative outlook.