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UPS reports higher profit, affirms outlook

UPS is holding onto its earnings expectations for the full year after reporting a 5 per cent increase in third-quarter earnings on Oct. 25, 2011.

Paul Sakuma/AP/Paul Sakuma/AP

United Parcel Service Inc. reported a higher quarterly profit Tuesday as increased pricing, cost cutting and technology improvements helped compensate for domestic shipping volume dulled by a sluggish economy, and it affirmed its outlook for record 2011 results.

The company's shares slid nearly 2 per cent in early trading, giving back some of a more than 15 per cent rally from this month's lows, with the pace of consumer holiday demand still in question.

The U.S. economy appears to have stabilized and is growing slowly, after concern about a possible double-dip recession stifled consumer demand earlier this year, UPS said.

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"Their tone was clearly more positive than it was last quarter, but make no bones about it, there's still some uncertainty," said analyst Kevin Sterling of BB&T Capital Markets in Richmond, Virginia.

"Given the run in the stock price in October, there's probably some profit-taking today," he said. "They didn't come out and say, hey, things are great and we're raising our guidance. They said things are okay, we're UPS and we're weathering the storm."

The company is well-positioned to handle a run-up in volume from customers with lean inventories ahead of the peak holiday season, analysts agree.

The final two weeks before Christmas could have a meaningful effect on fourth-quarter results if consumer demand picks up and retailers low on inventory need fast shipment of goods, chief executive Scott Davis told analysts on a conference call.

"Over the last month or so, we are starting to see, I could say, better economic numbers, so there is more optimism out there, and that could turn things around," Mr. Davis said. "We are still expecting a slow-growth economy, but I don't think it is as negative as people were thinking two and three months ago."

The company's shares were down 1.6 per cent at $69.71 (U.S.) in morning trading on the New York Stock Exchange, while the Dow Jones Transportation average fell 1.4 per cent.

UPS has forecast record earnings per share of $4.15 to $4.40 this year as it cut costs and raised shipping rates in the face of a slowly expanding global economy.

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UPS and FedEx Corp. are considered economic bellwethers because of the sheer volume of packages they handle.

The value of packages handled by UPS's trucks and planes each year is equivalent to about 6 per cent of U.S. gross domestic product and 2 per cent of global GDP.

Domestic shipping volume averaged 12.74 million packages a day, little changed from 12.73 million a year ago. Operating margins improved on higher yields, or revenue per package, as well as on more efficient networks, the company said.

Responding to slow exports from Asia, UPS said it had cut capacity there by 10 per cent, but it expects volume to pick up in the fourth quarter.

International shipping volume averaged 2.34 million a day, up from 2.24 million.

Revenue in this segment rose more than 14 per cent, twice the rate in the domestic segment, driven by 6.5 per cent growth in export volume.

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UPS has also been pushing for trade agreements that it says will open the way for more exports.

Mr. Davis, who is on the President's Export Council, has said that one UPS job is created for every 22 packages that cross international borders.

On Oct. 21, U.S. President Barack Obama signed free trade deals with South Korea, Panama and Colombia that are estimated to boost exports by around $13-billion annually.

The world's largest package delivery company said third-quarter net income rose to $1.04-billion, or $1.06 per share, from $991-million, or 99 cents per share, a year earlier.

Analysts on average were expecting $1.05 per share, according to Thomson Reuters I/B/E/S.

Revenue rose 18 per cent to $13.17-billion, matching the analysts' average forecast.

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