FedEx (FDX) and UPS (UPS) stock fell sharply after Morgan Stanley lowered its price targets for the firms amid concern over rising competition from Amazon.com (AMZN).
Analyst Ravi Shanker pointed out in a research note that the online retail behemoth is beefing up its own air delivery arm, Amazon Air, which could have negative consequences for the parcel giants.
He cut his price target for FedEx stock, which he rates as equal-weight, to 230 from 240, and for UPS stock, which he rates as underweight, to 87 from 92.
"For now, investors are focusing on Amazon's last-mile efforts, but we believe the challenge in Air is just as relevant," he said. "But given Amazon's plans to take delivery of 40 planes and build an air hub that could potentially handle 100 planes, we've taken a closer look at the impact of Amazon Air (its in-house Express Air network) on UPS/FedEx Air volumes."
FedEx stock sank 6.3% on the stock market today, plunging through its 50-day line, a move that also sent the relative strength line sharply downward. UPS stock tumbled 7.4%, diving below both its 50- and 200-day lines, though it remains off the 103.83 low of its current consolidation period.
Other players in the Transport-Air Freight Industry group were also down. Atlas Air Worldwide (AAWW) sank 6.9%, and Air Transport Services (ATSG) sold off 4.4%. Amazon stock fell 5.9%, also undercutting its 50-day and 200-day lines.
Morgan Stanley's Shanker estimates that package volumes are split between the United States Postal Service (40%-45%), UPS (30%-35%), FedEx (10%-15%) and Amazon's own network of independent service providers (10%-15%). He said Amazon Air could become an alternative to current Express providers UPS and FedEx, which could hurt the latter firms' profits in the future.
However, he sees big benefits to Amazon if it brings express shipping costs in house. It could cut costs to about $6 a unit compared to around $10 per unit at FedEx and $8 per unit for UPS.
The analyst said that in 2019, savings of between $2-$4 per package could result in $1 billion-$2 billion savings for Amazon. This represents between 3% and 6% of its global shipping costs. He also thinks Amazon Air could cause 2% of potential revenue loss for UPS stock and FedEx stock in 2018, and sees this accelerating to more than 10% by 2025.
"We expect this drag to intensify once Amazon Air has all 40 planes in the air (and potentially 100 planes if it runs its planned air hub at capacity) and as its utilization improves to UPS/FedEx levels," the analyst wrote.
Shanker believes the parcel giants will focus on broadening their customer reach to make up for revenue losses; however, he said Amazon could also threaten these efforts.
"(Increasing exposure to non-Amazon customers) should help offset the AMZN Air impact to some degree, though we note that AMZN is the dominant e-commerce player in the U.S. today, growing faster than the industry average, so they may be a hard customer to replace," he said. "However, even in this scenario, UPS/FDX may have to run into AMZN Air as a competitor for third-party volumes, if AMZN opens its doors to non-AMZN customers as we expect."