UPS, listed on the New York Stock Exchange under the symbol UPS, is currently considered a contentious investment in the industrial sector due to differing opinions from optimistic and pessimistic investors. Despite recent setbacks, the company is making progress in its medium-term strategy and could potentially see a turnaround by 2025.
### The Bearish Perspective
UPS has faced challenges over the past couple of years. The company’s management has twice overestimated the strength of the U.S. small package delivery market. Additionally, a lengthy and costly labor dispute in 2023 led customers to switch networks due to fear of strike action, impacting UPS’s margins.
Investors have also expressed skepticism about management’s projections. In 2023, during an investor and analyst day, management reaffirmed its full-year 2024 guidance and shared its plans for the following three years. However, just months later, this guidance was dramatically lowered during a July earnings call, with 2024 projections falling short of earlier estimates.
Further deviation from strategy was noted when management announced plans to reduce Amazon.com delivery volumes by 50% by the second half of 2026, a move that deviates from their March 2023 plan. This shift will require effective network readjustments and cost-cutting, and given past challenges in meeting guidance, investors remain concerned.
### The Bullish Perspective
Conversely, there are arguments supporting investment in UPS. Optimists highlight that the U.S. small package market is expected to recover, and the ongoing market overcapacity is likely temporary. UPS is reportedly making strides in expanding into targeted markets such as healthcare and small and medium-sized businesses (SMBs). The reduction in Amazon volumes aligns with a strategy to prioritize delivery profitability over sheer volume.
The company’s three-year strategic plan to build the “network of the future” includes investments in automation and smart facilities. This plan aims to optimize the network for fewer Amazon deliveries. The overcapacity issue stems from the rapid network expansion responding to increased demand during lockdown measures. As the economy improves, industry delivery volume is anticipated to grow.
UPS has made significant gains in higher-margin areas, with expectations to increase the SMB share of U.S. volume from 27% in 2021 to 32% in 2025. Additionally, the plan to double healthcare-related revenue from $10 billion in 2023 to $20 billion in 2026 remains on track. These positive developments demonstrate the company’s ability to achieve targeted goals despite challenges in the U.S. small package delivery market.
### Investment Considerations
The consensus leans slightly in favor of a cautious bullish stance. UPS is improving in strategic areas, although executing its plan to decrease Amazon volumes will take time. Management needs to address concerns regarding guidance expectations.
The shift toward higher-margin deliveries remains a core reason for investor interest in UPS, and the adjustment regarding Amazon is deemed strategically sound. Given these factors, UPS stock is considered a buy, particularly due to notable progress in healthcare and SMB sectors.
### Investment Guide
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