United Parcel Service

UPS' third-quarter revenue grew 7% year over year on surging fuel surcharges, favorable mix (revenue quality), and steady base rate gains. As expected, domestic volume fell on the Amazon drawdown. Excluding last year's sale-leaseback gain, we calculate that consolidated margin improved.

Why it matters: Adjusted US domestic package margin—a focal point for investors—improved 60 basis points to 7%, in line with our forecast, driven by capacity rationalization, growth among higher-margin customers, and core pricing gains. Management expects a 10.5% adjusted domestic margin in the fourth quarter, implying a full-year margin of 7.4%-7.5%, in line with our expected run rate. Overall, revenue-quality initiatives, along with efforts to rightsize the cost base to offset lost Amazon volume, continue to bear fruit. International profitability improved slightly to 14.9%, the first uptick since late 2024, with help from positive geographic trade lane mix. Total volume was down, but higher-margin US inbound activity rebounded, and Asia-to-Asia export volume continued to grow.

Between the lines: US domestic volume is still falling, but it sounds like declines will ease to around 1% year over year in the fourth quarter, slightly better than our forecast. In fact, excluding Amazon, third-quarter core volume rose 2% (as we heard it on the call), partly because UPS is gaining traction with small-business and enterprise accounts.

The bottom line: We do not expect to materially alter our discounted cash flow-derived $109 fair value estimate for wide-moat UPS, as our longer-term revenue and margin assumptions will likely remain intact. The shares reacted positively to UPS' results, likely due to incremental evidence of domestic cost takeout traction, along with good sequential improvement for international margins, which underperformed last quarter. The shares are fairly valued relative to our longer-term free cash flow forecasts; they were previously undervalued in mid-2025.

BLANK PAGEWe expect Amazon-related cost takeout to continue flowing into domestic margin in the quarters ahead. Assuming no oil price shock to demand, we also anticipate modest recovery in business-to-business volume amid sales efforts, industrial end-market recovery, and stable retailer restocking. With the Amazon drawdown complete, we expect business-to-consumer volume declines to ease, though year-over-year comps will remain challenging for several more quarters. Our model assumes domestic package segment margins improve to 8.5%-8.7% by 2028 (peak for this cycle), with an international margin of 15%-15.5%.

Our fair value estimate for UPS is $109 per share. Note that following Amazon's announcement that it is opening up its last-mile parcel delivery network to shippers (to a larger degree than in the past), our model assumes the firm successfully secures some degree of market share (albeit modest), dampening UPS' (and FedEx') domestic volume/yield growth opportunities slightly in 2027 and 2028.

In 2023, UPS’ revenue fell 9% on lingering e-commerce normalization in the US and Europe, muted retailer restocking, and soft industrial end markets. Shippers also diverted freight ahead of a threatened Teamsters strike, costing UPS domestic volume. Adjusted EBIT margin fell to 10.9% from 13.8% on US union wage inflation and lower volume.

Excluding the Coyote divestiture, revenue stabilized but remianed muted in 2024. Package revenue was roughly flat: business recovered from the 2023 labor negotiations and a B2C uptick (from US e-commerce growth) offset weak B2B volumes (soft industrial markets) and a mix shift to lower-yielding deferred services.

UPS' adjusted margin deteriorated to 9.8% in 2024 on US wage inflation. Furthermore, the onset of an unfavorable mix shift to lower-priced delivery services pressured US domestic yields. Some of UPS' domestic package volume gains came at the cost of strong growth from lower-margin e-commerce customers (including Temu and Shein), which drove a shift away from premium airlift to ground services, and from ground to lower-yielding SurePost (now Ground Saver) services.

Consolidated revenue fell 3% in 2025 due to the planned ramp-down of the Amazon relationship, along with sluggish industrial end markets and soft retailer restocking (for B2B volumes). US domestic package revenue fell 1%, with international package up 3% on first-half benefits from the inventory pull forward (ahead of tariffs) and positive intra-Europe activity, partly offset by falling US e-commerce imports from China in the second half. Domestic yields jumped 7% due to shedding lower-priced Amazon business—providing a partial offset to lost volumes.

Excluding a sale-leaseback gain, total adjusted margin fell to 9.4% in 2025 on unfavorable mix for the international division, wage inflation, and a jump in delivery costs for "ground saver" volumes insourced from the USPS. Domestic margin improved slightly to 7.7% thanks to UPS' wide-ranging network reconfiguration (including facility closures), the voluntary driver retirement program (variable cost reduction), and the shedding of lower-margin Amazon volumes.

We anticipate a modest rebound in business-to-business volumes in 2026 amid a gradual recovery in industrial end markets, stable retailer restocking, and efforts to grow small-business and enterprise accounts. Domestic volumes will continue to decline due to the Amazon drawdown. Overall, including a jump in fuel surcharges, we forecast total revenue to rise 4%-5%, with growth moderating to 2%-3% in 2027 and 2028 on tough yield comparisons from mix and fuel surcharges. That said UPS will lap Amazon volume losses in 2027, and we expect the return of roughly 1.5% domestic volume growth, with international activity up as well, assuming no oil shock to economic growth. We are also assuming core pricing gains remain healthy.

We look for consolidated adjusted margin to decline slightly to 9.3% in 2026, due mostly to lower international pacakge margins (unfavorable mix and fuel noise). We expect domestic margin to fall slightly, but efforts to rationalize the domestic cost base to Amazon volume losses have gained traction. We assume margin improvement returns in 2027, rising to 10%, with a domestic margin near 8.3%, up from 7.5% in 2026. Over the longer term, amid steady-state economic conditions, we think UPS can generate average top-line growth in the midsingle digits as it capitalizes on incremental e-commerce growth.

In our view, UPS’ flagship express and ground package delivery operations enjoy significant and durable competitive advantages rooted in cost advantage and efficient scale, which drive our wide Morningstar Economic Moat Rating. UPS is exceptionally capable of keeping would-be competitors at bay for a prolonged period. Its returns on invested capital have approximated an healthy 20% over the past decade, ahead of its cost of capital. ROICs trended down between 2018 and 2020 due in part to heavy investment spending and soft industrial end markets, but capital returns rebounded nicely in 2021 on the pandemic-driven surge in package volume and robust pricing conditions. ROICs eased in between 2023 and 2025 due to sluggish retailer restocking, soft industrial end markets (lackluster B2B activity), the loss of Amazon business, and heavy wage inflation. That said, we have very high confidence that excess returns will remain for at least the next 10 years.

FedEx, UPS, and DHL Express dominate the global parcel shipping landscape (FedEx and UPS in the US, DHL in Europe), and the networks these providers have erected constitute formidable barriers to entry. Holding constant Amazon insourcing more of its own package delivery needs and a handful of existing operators in non-US domestic markets, we think it’s unlikely that any other company will attempt to replicate a truly global parcel shipping network. An upstart would incur immense financial losses while trying to amass the volume and density necessary to absorb the remarkably high capital outlays and fixed costs associated with a global parcel delivery network. In replicating a network of planes, trucks, sorting facilities, and skilled employees, a new entrant would face massive investment before it could win a critical volume of customers from the entrenched incumbents.

Efficient scale applies in this context because a new entrant would have no choice but to replicate UPS’ sprawling asset base in the absence of economic package flow, yielding a long period of painful losses. This creates a major barrier to rational would-be entrants, who should have minimal incentive to enter. DHL Express’ decision in 2009 to exit the US domestic package market following six years of painful losses illustrates the power of this moat source. Scale-based cost advantages also arise for UPS due to the immense network processing scale and substantial package density. UPS enjoys considerably lower unit and marginal costs than a potential new entrant because it processes millions of packages over a massive far-reaching delivery network that’s marked by high fixed costs.

In May 2026, Amazon announced it was opening up its last-mile parcel delivery network to shippers outside of its own e-commerce network. Historically, the firm primarily constrained its capacity to meet its own rapidly expanding package delivery needs, but this move puts it in direct competition with FedEx and UPS. We've long considered Amazon's decision to morph into a commercial "for-hire" provider a risk to UPS and FedEx, and that threat is no longer theoretical. That said, our initial take is that the competitive impact will be manageable.

Uncertainty is high, but we suspect Amazon's efforts as a for-hire carrier will focus on opportunistically boosting the utilization of its network, rather than an all-out market share grab from FedEx and UPS that drags industry pricing through the mud for a season.

Amazon's e-commerce platform will likely see healthy growth in the years ahead, as will its internal delivery requirements. Amazon has built out a sprawling last-mile delivery network, but historically, that capacity has had its limits, especially during the all-important peak season. Recall it was UPS' decision to cull its relationship with Amazon—we suspect Amazon still needs UPS for a portion of its delivery needs, and that its overall sorting and delivery will remain bound over the longer term.

UPS' US ground and express package delivery operations should enjoy positive long-term tailwinds from e-commerce growth.

UPS' massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.

On top of superior parcel density, UPS uses many of the same assets to handle both express and ground shipments, contributing to industry-leading operating margins.

Amazon is ramping down the packages it sends via UPS by more than 50% by mid-2026. We believe UPS can rationalize capacity on roughly a 1-for-1 basis with lost Amazon volume (over time), but execution risk remains.

UPS' national master agreement with the Teamsters (renegotiated in the second half of 2023) is driving significant wage inflation.

While industrial end markets are improving, economic fallout from an oil price shock could restrict B2B shipment recovery in the year ahead.