UPS posts solid Q3 results, avoids dreaded FedEx read-through

For the past month, analysts and investors have been concerned that UPS Inc.’s third-quarter results would experience a negative read-through following rival FedEx Corp.’s (NYSE: FDX) September pre-announcement of weak fiscal first-quarter results.

Judging by UPS’ results released Tuesday morning, its stakeholders can breathe a sigh of relief. 

The Atlanta-based transport and logistics giant came in with adjusted diluted earnings per share of $2.99, beating consensus estimates by 15 cents per share. Operating profit of $3.1 billion rose 6% year over year. Revenue rose to $24.2 billion, up 4.2% year over year.

Perhaps as important, UPS (NYSE: UPS) reaffirmed the full-year financial targets that it had committed to in early September. It expects full-year revenue to be around $102 billion and adjusted operating margins of about 13.7%. Full-year capital expenditures will come in at $5 billion, down from the initial projections of $5.5 billion. 

The lower capex level is due in large part to the lessened use of costly aircraft charters and greater utilization of company-owned freighters known as “Browntails” after the company’s primary color.

The U.S. package segment, the company’s largest, posted an 8.2% revenue increase and an 11% adjusted operating margin. Revenue per piece, a key metric, rose 9.8% year over year. Increases in what UPS calls “base pricing” accounted for about one-third of those gains, UPS said. Cost per piece declined sequentially as UPS’ efficiency initiatives gained traction.

UPS’ international package segment posted a 1.7% year-on-year revenue increase. Operating profits fell slightly to $997 million, with adjusted operating margin coming in at 20.9%.

UPS’ Supply Chain Solutions division, which encompasses the company’s nonpackage business, posted a 6.3% drop in revenue as declines in air and ocean forwarding activities exceeded gains in the unit’s logistics and health care businesses. Adjusted operating margin hit a record for the third quarter of 11.5%.

Macro trends were a mixed bag, with domestic daily volumes down less than expected but with international volumes weakening more than anticipated due to continued pandemic lockdowns in China, turmoil related to the war in Ukraine and high inflation, UPS said.

U.S. business-to-consumer volumes dropped 2.2% year over year, while business-to-business traffic fell 0.5%, UPS said. B2B volumes accounted for 42.8% of UPS’ U.S. customer volumes in the quarter.

Small to midsize businesses, whose relative lack of price elasticity makes them coveted by parcel-delivery carriers, comprised 28.3% of U.S. volumes, a 1% gain from the year-earlier period.

UPS’ total costs rose 7% year over year. Wages and benefits accounted for nearly half of the increase. Annual compensation escalations under UPS’ five-year contract with the Teamsters union kicked in during August.

As of midafternoon Tuesday, UPS’ shares were trading higher by 58 cents per share at $168.11. Shares had been trading over $170 earlier in the session.

For the fourth quarter, which includes the peak holiday delivery cycle, U.S. revenues will increase 4.5% year over year, and operating margins will exceed 12%, UPS said. Peak volumes will decline year over year due to contractual adjustments with large enterprise shippers that will result in less volume from those customers, UPS said.

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