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What UPS Earnings Say About the Economy

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It's not back yet.

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United Parcel Service (UPS) reported third-quarter earnings per share of $0.55, topping the consensus estimate of $0.52.

Revenue, operating profit, and package volume were down, and earnings were boosted by aggressive cost-cutting. The earnings report looks like a glimmer of good news in a recession-battered economy, but it wasn't enough to boost the stock. In midday trading, shares of UPS fell by about 1%.

Asked on a conference call with analysts if UPS was well-positioned for an economic recovery, CEO Scott Davis said: "I'm very optimistic that UPS is in the right place at the right time."

In September, Credit Suisse (CS) upgraded its rating of UPS to Neutral from Underperform and JPMorgan (JPM) upgraded its view to Overweight from Neutral. The mean target price of 15 brokers surveyed is $60.80 a share. They currently trade at about $56.20.

UPS said third-quarter revenue declined to $11.2 billion, or 14.5%, from $13.1 billion for the same period a year ago. Average daily volume fell to 14.3 million packages from 14.9 million, or 4%. The company will reduce costs by about $1.4 billion in 2009 and said volume firmed late in the third quarter, suggesting the economy may have bottomed out and may be poised for a rebound.

However, slack revenue but better-than-expected earnings may be a recurring theme in the transportation sector. Earlier this week, CH Robinson Worldwide (CHRW), a third-party logistics provider that arranges shipments using trains, trucks, ships, and airplanes belonging to other companies, said total third-quarter revenue fell 15.6% to $1.95 billion, but net income grew 2% to $95.5 million by cutting operating costs 2.6%

Other transportation companies reporting earnings Thursday are Union Pacific (UNP), Burlington Northern Santa Fe (BNI), freight car and locomotive lessor GATX (GMT). Like UPS, earnings of these companies are indicators of the overall economy's efforts to recover from the recession.

The theory is simple: transportation companies haul the goods manufacturers produce to the stores, and consumers, that demand them.

But for now, not-as-bad-as-expected may be about as good as the news gets. The Association of American Railroads, a trade organization in Washington, DC, said that for the week ending October 10, rail traffic remained down: The nation's railroads originated 273,429 carloads, down 17.2% compared with the same week in 2008. For the first 40 weeks of 2009, US railroads reported cumulative volume of 10.6 million carloads, down 18.1% from 2008, and 7.6 million trailers or containers, down 16.6% percent from the same period last year.

But there will be no immediate miracles for UPS. US, domestic, and international package revenue is down in the third quarter of 2009 from the same period a year ago, falling to $6.8 billion from $7.4 billion domestically and to $2.42 billion from $3 billion internationally. Supply chain and freight revenue is also down, dipping to $1.9 billion from $2.3 billion. The good news: Average international volume per day rose to 2 million packages from 1.9 million a year ago. But US volume declined to 12.3 million from 12.9 million.

"UPS is the most profitable of its peers, we think by funneling substantially more package volume through its efficient assets," Keith Schoonmaker, an analyst at Morningstar, says in a research report. "Keys to its profitability are high utilization, an integrated organizational structure, efficient operations, and excellent drivers. Although FedEx (FDX) express and ground units together handle more than 6 million average parcels daily, UPS moves more than 2.5 times the volume through its sophisticated delivery machine. This enables UPS to cover the United States with a highly integrated web, filling its trucks and facilities with a huge flow of parcels."

Morningstar pegs the fair value of UPS stock at $70 a share, but warns "performance is tied to the health of the global economy, and we believe shipping volume will not recover for several quarters."

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