UPS: Assessing the Margin of Safety After a Strategic Reset

UPS is executing a necessary, if painful, reset to rebuild its economic moat. The core of this strategy is a planned reduction of Amazon shipping volumes by more than half by late 2026. This isn't a retreat from a key customer, but a disciplined shift away from the lowest-margin work to focus on more profitable segments. The rationale is clear: Amazon, despite being UPS's largest customer, contributed just 11% of its US$91.1bn revenue in 2024, a decline from 13.3% in 2020. CEO Carol Tomé has stated that Amazon is not its most profitable customer, a fact underscored by the company's own forecast that average daily US volume will drop by 8.5% in 2025 even as revenue per package is expected to rise by 6%.

This move is a direct response to a fundamental competitive threat. As Amazon expands its own delivery network, the economics of carrying its volume become increasingly strained. The market's reaction to this strategic pivot has been severe, with the stock down roughly 42% over the past three years. That decline reflects justified near-term uncertainty about execution and the immediate impact of lower volume. Yet from a value perspective, this volatility may be the noise that clears the path for a clearer signal. The company is using this period to insource its SurePost service, reconfigure its network, and drive a billion dollars in savings, all aimed at becoming a more profitable, agile and differentiated UPS.

The bottom line is that UPS is choosing durability over size. By accepting lower overall volume to serve a higher-quality customer base, it is narrowing its competitive moat to focus on areas where it can command better pricing and service premiums. This is classic moat-building: sacrificing easy, low-return growth to fortify the core. The market's skepticism is understandable, but it also presents a potential margin of safety for investors who can see past the near-term pain to the long-term goal of a more resilient and profitable business.

Financial Health and Valuation: The Margin of Safety

The company's financial health provides a solid foundation for its strategic reset, and the current valuation presents a classic value investor's dilemma. The stock trades at a P/E ratio of 16.68, a figure that is 26% below its 10-year historical average of 22.52. This discount to its own past is a key signal. It suggests the market is pricing in a prolonged period of lower earnings, likely due to the near-term volume drag from the Amazon reduction and the ongoing industry overcapacity. For a disciplined investor, this gap between price and historical multiples is the essence of a margin of safety-a buffer against error in one's own assessment of the company's future.

The strength of the dividend is another critical indicator of durable cash flow. UPS offers a 6.1% dividend yield and has maintained a 24-year streak of annual increases. This is not a yield supported by a deteriorating business; it is a hallmark of a company with a wide moat and a commitment to returning capital to shareholders. The payout ratio, while high, is sustainable given the company's scale and the expected margin expansion from its strategic shift. This income stream provides a tangible return even as the business navigates its transition.

Recent stock performance shows signs of stabilization after a turbulent period. The shares have gained 5.2% over the past 120 days, a modest but meaningful move that indicates some of the worst-case fears may be pricing in. The stock remains well below its 52-week high of $136.99, but the recent choppiness has given way to a period of consolidation. This pattern-sharp declines followed by a pause-is common in value traps that are actually rebuilding their economic engines.

The bottom line is that UPS's financials are robust, but its price is telling a story of recent struggle. The low P/E and high yield create a compelling setup for an investor who believes management's plan will succeed. The margin of safety here is not in the absence of risk, but in the depth of the discount relative to both the company's history and its dividend promise. It is a bet on the durability of the moat being rebuilt, with the dividend providing a steady return while the market decides.

Catalysts and Risks: The Path to 2026

The coming months will test the conviction behind UPS's strategic reset. The first major catalyst arrives on January 27, 2026, with the release of Q4 2025 earnings and the subsequent management discussion. This report will be the first comprehensive look at the company's financials through the lens of its planned Amazon volume reduction. Investors will scrutinize whether the forecasted 8.5% drop in daily US volume is materializing as expected, and more importantly, whether the promised 6% rise in revenue per package is translating into margin resilience. The management call will be a critical moment to assess the clarity of the transition plan and the confidence in its three-year targets.

A significant structural risk looms from an unexpected quarter. The expiration of the Amazon-USPS contract in October 2026 introduces a new variable. Reports indicate the USPS is considering a reverse auction to award Amazon's business, potentially opening its facilities to competitors. This could indirectly pressure UPS by increasing competition for the remaining Amazon volume that the company is not planning to carry. While UPS is shifting away from low-margin work, any acceleration in Amazon's own logistics footprint or a more competitive landscape for its remaining parcel flow adds an element of uncertainty to the volume trajectory.

Ultimately, the long-term success of the reset hinges on two pillars. First is the execution of the "Network of the Future" initiative, aimed at lowering the cost to serve through optimization and automation. This is the engine for the promised margin expansion and higher free cash flow. Second is the broader economic backdrop. The outlook for 2026 is for stable but uneven growth, with trade playing a smaller role in GDP. For UPS, this means the health of small-package volumes will be tied to domestic demand and consumer spending, not just e-commerce. A resilient economy supports volume growth, while a slowdown would pressure the top line even as costs are trimmed.

The bottom line is that 2026 is a year of decisive milestones. The Q4 earnings will provide a near-term verdict on the volume shift. The evolving USPS-AWS dynamic is a wildcard. And the company's ability to deliver on its network productivity targets will determine if the current valuation discount is justified. For a value investor, the path forward is clear: watch for signs that the moat is being rebuilt, not just defended.