1 Number Every UPS Investor Should Watch in Q3 Earnings

In the case of United Parcel Service (NYSE: UPS), it's all about adjusted operating profit margin. This key number lies at the heart of the company's transformational strategy, which entails reducing less-profitable Amazon deliveries in favor of higher-margin e-commerce deliveries, particularly in targeted markets such as healthcare and small and medium-sized businesses (SMBs).

At the same time, UPS's investments in smart facilities and automation are intended to improve productivity and, ultimately, margins. Everything points to margin expansion, but is it working out like that for UPS right now? Let's find out.

UPS changes guidance

In the fourth-quarter earnings presentation in January, management forecast full-year revenue of $89.7 billion and an adjusted operating profit margin of 9.6%, implying $8.611 billion in adjusted operating profit. The headline guidance was maintained on the first-quarter earnings call in April. Still, on the second-quarter earnings call, management increased its full-year revenue guidance to $91.2 billion and specifically said that adjusted operating profit would be about $8.65 billion.

Why the guidance change isn't good news

Superficially, it's an increase in revenue guidance and also an increase over the implied guidance of $8.611 billion I calculated above. However, there are two key considerations for investors, and they matter a lot for the upcoming results of a company with a near-7% dividend yield.

First, the new guidance implies an adjusted operating margin of 9.48%, down from the 9.6% initially forecast. Second, it's important to understand the nuance of the guidance change. As previously discussed, due to rising fuel costs, UPS raised fuel surcharges by $1.173 billion in the first half. Bearing in mind that the increase in full-year revenue guidance was $1.5 billion to $91.2 billion, it's reasonable to expect a large chunk of the revenue increase is due to the fuel surcharge.

Turning to the difficult question of how much profit UPS is making from the fuel surcharges, its fuel cost and third-party costs increased by $744 million, resulting in a net difference of $429 million -- a figure slightly more than the increase in adjusted operating profit guidance.

To be clear, management's position is that the fuel surcharge is intended solely to cover increased fuel costs, and there are associated costs related to fuel disruptions as well. Moreover, CFO Brian Dykes argued that "the net impact to consolidated operating profit dollars was modest" on the second-quarter earnings call.

In the absence of knowing exactly what kind of figure "modest" implies, it could be argued that the combination of a positive contribution from fuel surcharges over fuel cost -- something not likely to prove sustainable -- actually implies a significant decrease in adjusted operating profit margin if the impact of fuel is taken out.

The key metric to look out for

As noted, this is the year when UPS should start to build on margin improvement, not least because it finished the so-called "glide down" of Amazon deliveries by 50% (volume) from the start of 2025 to the middle of 2026. That's why investors are so focused on margin, particularly the expected adjusted operating profit margin in the U.S. domestic package segment.

I've replicated what the Wall Street consensus, according to S&P Global Market Intelligence, is expecting for the segment, and the company's total adjusted operating margins will be below. As is often the case with Wall Street estimates, the full-year U.S. Domestic Package margin guidance mirrors management's 7.5% guidance given on the last earnings call.

Adjusted Operating Profit	Q1 2026	Q2 2026	Q3 2026 Est	Q4 2026 Est	Full Year 2026 Est
U.S. Domestic Package	4%	7.96%	6.98%	10.56%	7.53%
Total company	6.24%	9.21%	8.92%	12.65%	9.4%

Data source: S&P Global Market Intelligence.

Watch UPS's margin guidance

All told, in the absence of management disclosing the exact figure, it's hard to know exactly how much fuel surcharges are adding to the blue chip stock's profitability. However, management has guided to a full-year U.S. Domestic Package adjusted operating profit margin of 7.5%, and the implied total company adjusted operating margin guidance is 9.48%.

Any failure to maintain those figures or meet the Wall Street analyst consensus in the table in the third quarter would suggest its margin trajectory isn't quite what most hope for. That said, if UPS beats both expectations, the margin expansion story will support the case for the stock.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, S&P Global, and United Parcel Service. The Motley Fool has a disclosure policy.