UPS: A Value Investor's Look at the Turnaround's Intrinsic Value

The core thesis for United Parcel Service is straightforward: it is a deeply discounted turnaround story. The stock has been punished, with shares down nearly 42% over the past three years and a dividend yield that now sits at a well-above-market 6.1%. This yield is not a sign of distress but a potential signal of value, offering income while the market waits for the company's strategic overhaul to bear fruit. The immediate test arrives on January 27, 2026, when UPS reports its fourth-quarter 2025 results. That earnings call will be the first major litmus test for management's disciplined plan to protect capital and improve returns.

Management's approach is focused and deliberate. The company is actively shifting away from low-margin volume, exemplified by its plan to reduce Amazon delivery volumes by half through mid-2026. This is not a retreat but a reallocation of resources toward higher-margin markets like healthcare, small and medium-sized businesses, and business-to-business deliveries. The goal is to improve the fundamental economics of the business, even if it means accepting lower total revenue in the near term. This strategic pivot is supported by significant cost reductions, with the company cutting $3.5 billion in expenses last year as part of the Amazon "glide" down. The plan is to use these savings and ongoing investments in automation to drive future growth and earnings.

The setup for 2026 is one of transition. The company is on track to miss its initial 2025 earnings and cash flow guidance, a setback that underscores the near-term uncertainty. Yet, the bulls argue that 2025 is a rest year for the strategy, and 2026 is when the cost cuts and restructuring are expected to start paying off in terms of earnings growth. The catalyst is clear: the January 27 report will show whether the progress in revenue per package and the disciplined focus on margins are translating into tangible financial results. For a value investor, the appeal is the combination of a wide moat in a critical logistics business, a depressed valuation, and a management team executing a plan to rebuild intrinsic value.

Assessing the Quality of the Turnaround: Pricing Power and Financial Health

The recent quarterly results provide a clear picture of the turnaround's quality. The numbers show momentum, but also highlight the importance of looking past the headline figures to see the underlying business health. For a value investor, the key is to assess whether the operational improvements are durable and rooted in a stronger competitive position.

The most encouraging sign is the recovery of pricing power. In the third quarter, UPS's revenue per piece grew by 9.8% year over year. This is a critical metric because it demonstrates that the company is successfully shifting away from low-margin volume and regaining control over its rates. Management's strategy to pare Amazon delivery volumes and target lower-yielding e-commerce traffic is translating into better revenue quality. This is the essence of a moat being rebuilt: the ability to charge more for the same service, which directly improves the fundamental economics of the business.

Financially, the results show a company in transition. The non-GAAP adjusted diluted EPS of $1.74 for the third quarter indicates solid underlying profitability. However, the GAAP operating margin of 11.6% was pressured by a significant $639 million non-cash pension charge. This starkly illustrates why adjusting for one-time items is essential. The $639 million charge alone would have wiped out the entire GAAP operating profit for the quarter, leaving a negative margin. The non-GAAP adjusted operating margin of 12.3% for the fourth quarter of 2024, which excludes such charges, provides a much truer picture of the core business's earning power. It shows that, without these accounting hits, the company's operations are profitable and improving.

The bottom line is one of selective strength. While total revenue declined, the focus on revenue per piece and the disciplined management of costs are creating a more resilient financial foundation. The recent results confirm that the strategic pivot is working on the key metric of pricing. For the long-term investor, the durability of this improvement will be tested in the coming quarters, but the evidence so far suggests UPS is successfully trading volume for quality, a move that should widen its economic moat over time.

Valuation and the Margin of Safety

The recent rally offers a moment to step back and assess whether the current price still provides a sufficient margin of safety for a long-term investor. The stock has indeed risen, gaining nearly 30% over the past three months as the market begins to price in the turnaround's early successes. Yet, this move leaves the shares still far from their peak. The share price remains down 53% from its 2022 highs, a stark reminder of the depth of the prior sell-off and the significant value that may still be embedded.

From a valuation perspective, the numbers present a compelling case. A discounted cash flow analysis suggests the stock is trading at a 15.2% discount to its estimated intrinsic value. This gap is the margin of safety-the buffer between price and a calculated fair value. It is a classic setup for a value investor: the market is pricing in the near-term pain of the strategic shift, while the long-term compounding potential of a rebuilt business is not yet fully reflected. The wide moat, built on a vast and complex network of trucks, planes, and sorting facilities, supports this view. This infrastructure creates formidable switching costs for customers and is a key reason why even a giant like Amazon remains reliant on UPS. A company with such durable assets is better positioned to compound value over decades, even through a difficult transition.

The bottom line is one of patience versus opportunity. The recent price pop shows the market's growing confidence in the pricing power recovery. However, the stock's distance from its highs and the persistent discount in the DCF model indicate that the intrinsic value story is not yet fully priced in. For a disciplined investor, the margin of safety remains intact, anchored by the company's fundamental competitive position. The January 27 earnings report will be the next test, but the valuation today suggests the risk-reward setup favors those willing to wait for the full turnaround to materialize.

Catalysts, Risks, and What to Watch

The immediate test is now. The January 27 earnings report and the subsequent investor call will be the first major litmus test for the turnaround's sustainability. Investors will be looking for confirmation that the 9.8% year-over-year revenue per piece growth seen in the third quarter is not a one-off but a durable trend. More critically, the call will provide the first formal guidance for the first quarter of 2026. This guidance will signal whether management's plan to cut costs and shift to higher-margin businesses is on track to deliver the earnings growth that bulls anticipate in 2026.

The long-term outlook hinges on two interconnected factors: successful execution and sustained pricing power. The company has already cut $3.5 billion in expenses in 2025 as part of the Amazon "glide" down. The next phase is to convert these savings into higher earnings while navigating a still-challenging market. Management's focus on higher-margin sectors like healthcare, small and medium-sized businesses, and business-to-business deliveries is the right strategic pivot. The key risk is that broader economic headwinds, as hinted at by the company's missed 2025 guidance, could slow the recovery in these targeted end markets. For the value investor, the durability of the pricing power shift is paramount. The business must prove it can maintain elevated revenue per piece even as overall volume adjusts.

From a financial health perspective, two metrics deserve close monitoring. First is the dividend payout ratio. With a yield now at 6.1%, the safety of this income stream is a primary concern. Investors need to see that the company's free cash flow generation is robust enough to comfortably cover the dividend, even as it funds its strategic investments. Second is the trajectory of cash flow itself. The company's ability to generate strong operating cash flow will determine its capacity to fund automation projects, manage its capital-intensive network, and return cash to shareholders-all without straining its balance sheet. The recent $639 million non-cash pension charge serves as a reminder that accounting items can distort the picture; the focus must remain on underlying cash-generating ability.

The bottom line is one of patience versus proof. The January 27 report offers the first concrete evidence of whether the strategic pivot is working. For the long-term investor, the thesis remains intact if management can demonstrate that the cost cuts are translating into earnings growth and that the pricing power recovery is real. The wide moat provides a foundation, but the company must execute flawlessly to rebuild its intrinsic value.