The thesis
The percentage of sales online continues to grow vs in-person. Amazon Deliveries are the main competitor coming up, and new competitors without the backing of one of the largest companies in the world, face an uphill battle to get in an industry largely dominated by UPS, Fedex and USPS. In this analysis we will focus on UPS, as I consider it the best opportunity out of current parcel delivery services. Many of the reasons I have for UPS apply to Fedex and other, hence diversification may be appropriate to reduce risk in exchange for little impact to expected returns.
UPS and Fedex have been dropping substantially in the past years, with UPS dropping particularly hard in 2025. See current status:
UPS past 5 years
Fedex past 5 years
I believe, however, that the market is continuing to trend towards e-commerce dominance in more sectors that have shown resistance so far to it (Clothing, Wearable Accessories, Groceries…) and I think that legacy carriers are in a unique position to abstract logistical complexities away from new industries and increase their revenues. I also believe that recent catalysts for UPS’s price decline are overblown. Hence, the thesis today is that UPS & Fedex are underrated and the reasons apply stronger to UPS.
Price drop catalysts
One of the recent decisions by UPS’s new leadership is to drop ~50% of Amazon deliveries. This has been received negatively by the market, while also coinciding with a decrease in earnings in recent quarters. The news released ~Jan 30 of 2025, and it compounded with twice with 1 market wide catalysts (Liberation Day, April 2nd) and a disappointing earning release on July 29th. It is likely that the earnings (October 28th) may also be disappointing, which may drag the price even further.
Let’s dismantle 2 of the main catalysts and see if their effect on UPS should be as big as a 40% drop in price, which we have seen this year.
Dropping Amazon deliveries
Amazon is one of the stock market’s darlings, part of the magnificent 7 and overall beloved dearly by most of it’s investors, which are legion. Hence, when news break out that amazon will get into a new market or industry, stocks of potential competitors drop overall in memory of the many victims of Amazon such as Barnes & Nobles, Sears, Toys “R” Us, and Diapers.com and many others that died to Amazon’s entry in their market. Hence, the fact that Amazon increased the proportion of their own deliveries and UPS dropping 50% of Amazon’s delivery was interpreted as UPS losing 50% of their main client’s business, hence a sign of the company’s downfall. This does seem to me the right choice.
Amazon is notorious for its insistence in low margins and it translates that into their relationships with contractors, such as UPS, who expect to make their profit out of sheer volume. Although this model can work very well with SOME contractors who can scale easily (for example, software based) it is not that good of a model with physical partners who have to invest into assets, such as UPS, and train new hires in a somewhat difficult job. UPS has dropped the lowest 50% of their commitment to a low margin client, while keeping the most lucrative 50% of their delivery routes. To be able to handle other individual clients with less leverage over UPS, they definitely need to open that capacity reserved to Amazon. To me, this seems like a win, although somewhat painful in the short term. In defense of their current CEO, it seems like a sign of good management to sacrifice short term profits for long term, and,
I think Carol is fairly optimistic about her strategy as well. Two of her directors see it clearly, as they bough recently in the open market as well:
De minimis exemption
Although the main catalysts this year seems to have been the drop of Amazon deliveries, another of the catalysts this year has been the administration’s decision to drop the “De minimis” exemption for tariffs. Most of the stock market recovered and increased in value vs the price on Liberation Day. Although UPS started doing so, more slowly, than the market. However, the drop in earnings in July caused another reaction, taking the stock to it’s worst level since 2013. It is very difficult to estimate the impact of this exemption changes to UPS and Fedex’s baseline, as the level of data breakdown to see the concrete revenue coming out of international packages from Temu and the like is confidential to the company, a trade secret. However, we can see in their earnings release that a majority of their revenue is domestic deliveries, and we can estimate that international deliveries also contain high value parcels that were never exempt of tariffs in the first place, plus parcels that go from the United States outwards, hence not affected by the large tariffs imposed by our administration and only affected by smaller ones put in place by others.
Conclusion
The stock has dropped nearly 40% since it’s price at the beginning of the year. Although I agree that some of the catalysts are valid (mostly the Tariffs) i don’t think they are that impactful. I also believe that other negative catalysts such as dropping the bottom half of Amazon deliveries are misinterpreted and will likely end up showing as great business decisions. Hence, I got ~3% of my portfolio in UPS, investing ~30% of my total cash at an average of $83.5. I think a better opportunity to buy may be after another, likely disappointing, earning release on October 28th. I expect leadership to use this rock bottom opportunity to unload all bad news and forecasts on UPS in one sitting. However, I bought early on because I do not want to miss this opportunity in case the stock goes up after earnings release. I have decided that, if the stock drops after earnings release I will increase my position by another 50% to 4.5% of my portfolio.