UPS' (UPS 0.12%) recent fourth-quarter earnings report was monumental. It wasn't so much the numbers from the final quarter of 2024 as it was management outlining the strategic changes it was making to its business. The market didn't like the update much, sending the stock sharply lower. At the time of writing, it's down 9.4% in 2025.

Still, the changes align with management's philosophy, and there's a robust case for arguing that the stock is an excellent value right now. Here's the lowdown.

UPS delivers change

Let's start by looking at the changes announced by UPS. CEO Carol Tome said the changes were necessary, as UPS could "lose momentum" in the U.S. unless it addressed three specific challenges:

• A slowing U.S. small package delivery market with "changing package characteristics" -- indeed, UPS management overestimated demand in the U.S. small package market for the last two years
• An over-reliance on its largest customer, Amazon.com (NASDAQ: AMZN) -- Amazon was responsible for 11.8% of total company revenue in 2024
• A reliance on the United States Postal Service (USPS) for its UPS SurePost (lower cost, less urgent deliveries)

Management decided to take pre-emptive action over these "challenges" in two ways. First, it agreed with Amazon to gradually lower its delivery volumes until it had 50% of its current volume by the second half of 2026. As noted above, Amazon is a major customer, and this implies a significant reduction in volume and revenue from the e-commerce company.

Second, UPS will bring the SurePost deliveries currently undertaken by the USPS in-house.

These changes can immediately be seen in the full-year 2025 guidance, whereby management expects lower revenue (fewer Amazon deliveries) but higher overall operating margin and higher operating margin in the U.S. domestic package segment. Consequently, management expects adjusted operating profit to improve as it enacts the strategic change of adjusting its network away from lower-margin Amazon deliveries and reaps the benefit of a positive shift in margin.

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

Risks ahead for UPS

In theory, at least, the plan makes sense, but the market sold the stock off on the news, and many Wall Street analysts lowered their price targets on it. The reasoning behind both moves most likely comes from skepticism over the execution of UPS' plans to simultaneously lower Amazon delivery volumes and lower costs in its network. CFO Brian Dykes promised more color on the issue on the first-quarter earnings call in a few months, but investors have reason to be cautious, given UPS' execution over the last couple of years.

Image source: Getty Images.

Why UPS is well-placed

That said, most of UPS' problems in recent years have come from a combination of lower-than-expected U.S. small package delivery volume and a protracted and costly labor dispute in 2023.

Moreover, there are clear indications that UPS is improving its underlying business. Its three-year transformational plans outlined on its Investor Day last year involve continued focus on expanding deliveries in targeted areas like small and medium-sized businesses (SMBs) and healthcare, while investing in productivity-enhancing IT (automation and smart facilities) to enable asset consolidation.

The early results have been encouraging. SMB volume as a share of U.S. volume rose to 28.9% in 2024 from 28.6% in 2023, driven by a 17% increase in its digital access program. Management expects an increase to 32% in 2025. Healthcare-related volume grew by 5% to $10.5 billion in 2024 and aims to reach $20 billion by 2026. Furthermore, the IT investments resulted in the closure of 11 buildings, and management continues to invest in smart and automated facilities.

Furthermore, as previously discussed, one of the key metrics to follow with UPS is the spread between its revenue per piece (RPP) and its cost per piece (CPP) in its U.S. domestic package segment. For the second quarter running, UPS reported a favorable result.

Data source: UPS presentations. Pp = percentage points.

What it means to UPS investors

Focusing on higher-margin deliveries rather than chasing delivery volume lies at the heart of UPS' "better not bigger" approach, and the plan to reduce lower-margin Amazon delivery volumes makes perfect sense. Meanwhile, UPS is demonstrating underlying progress in its strategic objectives (SMBs, healthcare, "network of the future") and growing the RPP/CPP spread, which shows confidence that it can hit its targets.

Image source: Getty Images.

While there's no guarantee that UPS will successfully finesse a lowering of Amazon volumes and cut costs smoothly in the process, the trailing price-to-earnings ratio of 14.1 times earnings and a dividend yield of 4.9% gives a good margin of safety, and the stock looks like an excellent value prospect.