United Parcel Service

UPS' second-quarter revenue flipped positive year over year (up 8%) driven by spiking fuel surcharges, favorable mix, and resilient core pricing. Domestic volumes were still down (Amazon drawdown), but declines are easing. Consolidated adjusted margin improved on domestic cost-takeout traction.

Why it matters: Adjusted US domestic margin improved to 8%—in line with our forecast—on efforts to adjust network capacity and favorable core pricing. Margins rose significantly sequentially, likely due to the absence of temporary weather and claims costs, along with easing costs associated with transitioning ground saver volumes to the US Postal Service. Management expects a 7.5% adjusted US domestic margin for 2026; below our 7.7% forecast. Still, the firm expects cost and revenue-quality initiatives to drive 50 basis points-100 basis points of positive spread between revenue per package and cost per package in the second half, which should support additional margin gains. International profitability deteriorated again and missed our forecast, likely due to fuel noise and a tough mix comparison. However, China-to-US package volumes seem to have returned to growth in the quarter.

The bottom line: We do not expect to materially alter our DCF-derived $109 fair value estimate for wide-moat UPS. We will temper our medium-term domestic margin forecasts slightly, but that will likely be offset by higher revenue forecasts and the time value of money. We suspect some of the current share price weakness stems from a slight decrease in 2026 domestic margin guidance and the lackluster international margin showing. Management expects continued domestic margin progress in the second half, but UPS remains somewhat of a show-me story. UPS' shares have risen off of mid-2025 lows, driven in part by cost-savings traction and rising potential for cyclical recovery in B2B volumes. The shares are fairly valued relative to our longer-term free cash flow forecasts (previously undervalued).

BLANK PAGEWe are still assuming UPS secures incremental benefits from fixed and variable cost rationalization this year. Macro risk remains, but we also anticipate modest recovery in business-to-business volumes amid sales efforts, a potential cyclical uptick for industrial end markets, and stable retailer restocking. Our model assumes domestic package segment margins can improve to 8.5%-8.7% by 2028 (peak for this cycle), with an international margin of 15.0%-15.3%.

Our fair value estimate for UPS is $109 per share. Note that following Amazon's recent 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, dampening UPS' (and FedEx') domestic volume/yield growth opportunities slightly over the next few years.

In 2023, UPS' revenue fell 9% on lingering normalization for e-commerce activity across the US and Europe, muted retailer restocking, and soft industrial end markets. Lost US domestic package volume also contributed as shippers diverted freight ahead of a threatened Teamsters strike. Consolidated adjusted EBIT margin deteriorated to 10.9%, from 13.8%, on union contract wage inflation in the US and lower package volume.

Excluding the Coyote divestiture, UPS' revenue trends stabilized but remained muted in 2024. Total package revenue was roughly flat as the return of business lost during the 2023 labor contract negotiations and an uptick in B2C activity (driven by US e-commerce growth) were offset by continued weak B2B volumes (soft industrial end markets) and a mix shift to lower-yielding deferred services.

UPS' adjusted margin deteriorated to 9.8% in 2024 on union wage inflation in the US. 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 continued 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. We note that 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 remained flat at 9.8% in 2025 due to investments in Europe and unfavorable mix for the international package division. 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. This was partly offset by wage inflation and a jump in delivery costs for "ground saver" volumes insourced from the USPS.

Macro risk remains, but we anticipate modest recovery in business-to-business volumes in 2026 amid a potential cyclical uptick for industrial end markets and stable retailer restocking. Additionally, UPS will start lapping Amazon volume losses in the second half. Overall, when including a meaninful jump in fuel surcharges, we forecast total revenue to rise 2%-3%, with growth near 3% in 2027 and 2028, assuming no oil price shock, tarriff headwinds abate, and economic conditions see a modest rebound.

We look for consolidated adjusted margin to decline slightly to 9.4% 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 10.1%, with a domestic margin near 8.3%, up from around 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 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 appear to be improving, economic fallout from US tariffs or an oil price shock could restrict B2B shipment recovery in 2026.