Unpacking UPS’ Huge Q4 Announcement: What Investors Need to Know

The recent quarterly earnings announcement from UPS (NYSE: UPS) was significant, not so much for the numbers of the fourth quarter of 2024, but for the strategic adjustments conveyed by the leadership. The market response was less than favorable, with the company’s shares declining by 9.4% into 2025.

Despite this, these changes reflect the company’s strategic direction and present a compelling argument that UPS shares are currently undervalued. Here are the details.

UPS Embraces Strategic Shift

First off, let’s examine the adjustments UPS is making. CEO Carol Tome highlighted the necessity of these changes to prevent potential stagnation in the U.S. market. She pinpointed three main challenges:

• A decelerating market for small package deliveries in the U.S., characterized by shifting package dynamics — a trend that UPS management had overestimated in the past two years
• Excessive dependence on their largest client, Amazon.com (NASDAQ: AMZN), which accounted for 11.8% of UPS’s total revenue in 2024
• Reliance on the United States Postal Service (USPS) for their UPS SurePost services, which are less urgent and lower-cost deliveries

In response, UPS has initiated two major strategic decisions. Firstly, they have agreed with Amazon to reduce delivery volumes progressively, aiming for 50% of their current volume by the second half of 2026. Given Amazon’s role as a major client, this reduction is significant and will impact revenues derived from the e-commerce giant.

Secondly, UPS plans to internalize the SurePost deliveries that are currently handled by USPS.

The immediate effects of these strategic moves are reflected in the 2025 full-year guidance, which forecasts lower revenues due to decreased Amazon deliveries but anticipates an increase in both overall operating margin and the operating margin within the U.S. domestic package segment. As a result, adjusted operating profits are expected to improve as UPS shifts its network away from lower-margin Amazon deliveries and benefits from improved margins.

Data source: UPS presentations. GAAP = generally accepted accounting practices. *Author’s calculation.

Challenges Ahead for UPS

While the strategy appears sound in principle, the market has reacted negatively, and analysts have revised their price targets downward, likely due to doubts about UPS’s ability to effectively manage both the reduction in Amazon delivery volumes and cost optimizations across its network. CFO Brian Dykes has promised further details during the first-quarter earnings call, but investors remain wary given the company’s recent performance challenges.

UPS’s Strong Position

In recent years, UPS has faced issues primarily due to unexpected drops in U.S. small package volumes and a prolonged, expensive labor dispute in 2023.

However, UPS is showing signs of robust improvement in its core operations. Their three-year transformation plan, discussed during last year’s Investor Day, includes a continued emphasis on expanding delivery services to small and medium-sized businesses (SMBs) and the healthcare sector, along with investments in productivity-enhancing technologies such as automation and smart facilities.

Early results are promising: SMB volume as a percentage of total U.S. volume increased slightly in 2024, and healthcare-related volume is on track to double by 2026. Moreover, technological investments have led to the consolidation of facilities, with 11 buildings closed last year.

Additionally, a key performance indicator for UPS is the gap between revenue per piece (RPP) and cost per piece (CPP) in its U.S. domestic package segment, which has shown favorable results for the second consecutive quarter.

Data source: UPS presentations. Pp = percentage points.

Implications for UPS Investors

UPS’s strategy of prioritizing high-margin deliveries over volume aligns with its “better not bigger” philosophy. This approach, particularly the planned reduction in Amazon-related volumes, is sensible. UPS is also making noticeable progress towards its strategic goals (SMBs, healthcare, “network of the future”) and is improving the RPP/CPP spread, indicating confidence in meeting its targets.

While successful execution of these strategies is not guaranteed, the current price-to-earnings ratio of 14.1 and a dividend yield of 4.9% offer a substantial safety margin, making UPS stock an attractive value proposition.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.

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