UPS Margins Show Growth Despite Revenue Woes: Scope for More Upside?

Core Viewpoint - United Parcel Service (UPS) is experiencing revenue weakness primarily due to subdued demand influenced by tariff-related uncertainty, elevated inflation, and broader geopolitical challenges, with a 3.7% revenue decline in the September quarter compared to the previous year [1]. Revenue and Margin Performance - Despite the revenue decline, UPS has seen an increase in its adjusted operating margin, which reached 10% in Q3 2025, up from 8.9% a year ago and 8.8% in Q2 2025, driven by effective cost management and a 9.8% increase in revenue per piece [2][10]. - UPS anticipates further improvement in the adjusted operating margin, projecting it to be in the range of 11-11.5% for Q4 2025, with an estimated revenue of $16.2 billion in the U.S. Domestic segment and an adjusted operating margin of around 10% [4]. Customer Relationship and Cost Management - Earlier in the year, UPS decided to reduce its business with Amazon, its largest customer, aiming to lower Amazon's volume by over 50% by June 2026. This decision is expected to result in a $2.2 billion reduction in expenses related to Amazon by the end of Q3 2025, with a target of $3.5 billion by year-end [3][10]. Competitive Landscape - FedEx, a competitor of UPS, is also facing weak demand and is implementing cost-cutting measures. In Q1 of fiscal 2026, FedEx achieved $200 million in transformation-related savings and reported a 7% increase in adjusted operating income [5]. Stock Performance and Valuation - Over the past six months, UPS shares have declined by more than 6%, underperforming its industry [6]. - From a valuation perspective, UPS trades at a 12-month forward price-to-earnings ratio of 13.16X, which is nearly in line with industry levels [11].