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United Parcel Service, Inc. (NYSE:UPS) reported Q3 earnings before the opening bell.  Third quarter earnings for the large transportation company reported EPS of a $1.03  and was in line with consensus.  Solid volume gains were achieved in the Domestic package network, but improved international profitability explained the vast majority of the upside to forecasts.  United Parcel Service, Inc. (NYSE:UPS) largely maintained its outlook for the fourth quarter, tightening up the 2012 guidance range to $4.55 to $4.65.  That range implies a mid-point for the fourth quarter of around $1.39, above current expectations and representing growth versus the prior year.  Some analysts had expected a further reduction to the outlook, but expectations for solid e-commerce package growth during the holiday season is providing United Parcel Service, Inc. (NYSE:UPS) confidence it can generate expanded earnings, even in a slower growth environment.

Barclays broke up each segment nicely:

Domestic Package – Volume gains continued at a brisk pace, especially in the premium product segments of Next Day Air and Deferred packages, with growth of over 5% and 9%, respectively.  However, profitability for the segment actually declined with EBIT margins contracting 50bps versus the prior year.  Package yields were softer than forecasts in the Domestic air segments, likely a function of greater lightweight business to consumer traffic mix.

International Package – International profitability surprised on the upside, with EBIT margins exceeding 15%, despite prior guidance for a decline.  Although International export package volumes only increased 1% in the quarter, the company highlighted less currency headwind and network changes as the primary drivers of improvement.  We suspect the company’s prior announcement to cut a further 10% of trans-Pacific air capacity likely aided costs during the quarter.  The company also highlighted growth in Asian export packages, a first in several quarters, and likely aided by consumer product launches during the period.

Supply Chain & Freight – The Supply Chain segment came in slightly below Barclay’s estimates, as overcapacity in the forwarding segment pressured results.  The company also highlighted investments in distribution businesses, which weighed on margins in the quarter.  However, domestic freight LTL results appeared favorable, with rates increasing 1.5%.

On the Economy and Politics

On the conference call, Scott Davis – United Parcel Service, Inc. (NYSE:UPS) – Chairman & CEO states:

In Europe, more countries are slipping into recession as they impose austerity measures. Though the economy there has contracted, the small package market has not. In Asia, although projections have come down, economic growth there leads the world. Although, as I said last quarter, exports continue to lag GDP growth.

Here in the US, though some of the recent economic indicators provide optimism, generally economists have lowered their expectations for the remainder of the year. The lack of clear direction on future tax and spending policy has and will continue to slow business investment. This will clearly impact the B2B small package market.

Regardless of the outcome in November, the US is on the edge of a fiscal cliff, and there is concern whether our politicians can reach an agreement that solves these issues. The lack of political will to fix our debt problem adds to the uncertainty in our economy. Just what we don’t need. That is  why we are supporting Fix the Debt, the organization founded by former US Senator, Alan Simpson and Clinton Chief of Staff, Erskine Bowles. Our goal is to have a bipartisan debt reduction plan drafted when Congress returns in January, and we believe it is realistic to have it passed in early 2013. If solutions are in place to both reduce our deficit and eliminate the threat of a fiscal cliff, the US will be in a much better position for sustained economic growth.