One of the most intriguing investment propositions in the industrial sector, UPS (UPS -0.15%), is a battleground stock for bulls and bears. Although the company has disappointed investors in recent years, it's making underlying progress in its medium-term strategy, and a turnaround could be under way in 2025. Here's what you need to know before buying the stock.

The bears' case for UPS

It's been a difficult couple of years for UPS. For two years running, management has overestimated the strength of the U.S. small package delivery market. In addition, UPS had a protracted and costly labor dispute in 2023. Customers switched to other networks in fear of strike action, and costs associated with the ultimately agreed-upon new contract hit UPS's margins.

Moreover, investors have reason to doubt management. Last year, the company held an investor and analyst day, during which management reiterated its full-year 2024 guidance and laid out its plans for the next three years.

A few months later, management slashed its full-year guidance on its earnings call in July, Itended 2024 nowhere near the guidance laid out in March.

Data source: UPS presentations.

Moreover, after laying out its three-year strategic plan in March 2023, management has departed from it with its momentous decision to reduce its Amazon.com delivery volume, which was responsible for 11.8% of total company revenue in 2024, by 50% by the second half of 2026. It's a change that will require good execution in terms of network readjustments and cost-cutting, and given the difficulties in meeting guidance in recent years and the abrupt change of plans, investors have cause for concern.

The bulls' case for UPS

The bullish argument for buying the stock rests on the following:

• The U.S. small package market will eventually improve, and the overcapacity in the marketplace will reduce over time.
• UPS is making demonstrable progress in expanding into key targeted markets, such as healthcare and small and medium-sized businesses (SMBs).
• The reduction in Amazon volumes is entirely in tune with management's operating philosophy of maximizing the profitability of its deliveries rather than chasing volume in itself.
• As the three-year plan outlines, UPS is building the "network of the future" by investing in automation and smart facilities. It makes sense to do so while structuring its network for fewer Amazon deliveries now rather than later.

The overcapacity issue is a hangover from when package delivery companies significantly expanded their networks in response to the boom in demand created by the lockdown measures. As such, it's likely to prove temporary, and industry delivery volume will grow with an improving economy.

Image source: Getty Images.

Meanwhile, UPS continues to make progress in higher-margin targeted areas and expects the SMB share of its U.S. volume to hit 32% in 2025, compared to just 27% in 2021. In addition, there's no change to management's plan to double its healthcare-related revenue from $10 billion in 2023 to $20 billion in 2026.

These are successful initiatives, and despite the issues with the U.S. small package delivery market, management has delivered on them.

Finally, the technology investments implicit in the "network of the future" are intended to improve productivity and allow the transportation company to close facilities handling deliveries that can now be processed in super-efficient facilities. That's a significant plus in itself, and it dovetails with the need to realign its network in light of the reduction in Amazon volumes.

Image source: Getty Images.

A stock to buy?

On balance, a weak, bullish approach makes sense. UPS is improving in the areas it wants to improve in, but there are question marks about executing its plan to lower Amazon volumes that will take time to answer fully. In addition, UPS management needs to steady the ship regarding meeting guidance.

That said, the shift toward higher-margin deliveries is why many investors bought into UPS stock in the first place, and the Amazon adjustment makes perfect sense. Management deserves the benefit of the doubt, and the risk/reward calculation suggests the stock is a buy, not least because of the underlying progress in healthcare and SMBs.