United Parcel Service (NYSE:UPS) posted lower revenues and earnings in the third quarter despite an increase in the shipping volume. The growth in low-priced ground and deferred services particularly in domestic U.S. package delivery segment was more than offset by decline in average revenue per package.
Revenues were $13.07 billion, marginally lower on a y-o-y basis and earnings were $0.48 per share down 56% y-o-y in the three months ended September 30, 2012.  Earnings were impacted by a one-time pre-tax charge of $896 million related to pension restructuring. However, in spite of softness in international trade and global economic headwinds UPS maintained its full year adjusted earnings outlook in the range $4.55 to $4.65 per share, up 5% to 7% on an y-o-y basis. 
Domestic U.S. package delivery segment continues its strong performance
The U.S. economy expanded at a moderate rate in the first three quarters of the year. Industrial production and retail sales, particularly online retail sales, continued to grow providing for growth in the small package delivery market in the U.S. As a result, revenues in the domestic U.S. package delivery segment of UPS increased 1.2% y-o-y in the third quarter driven by growth in revenues from ground and deferred shipping partially offset by lower revenues from air-based shipping.
However, operating profit in the domestic U.S. package delivery segment declined nearly 88% y-o-y due to the one-time charge of pension restructuring.  This segment is the most valuable segment for UPS constituting nearly 59% of the total company value.
International package delivery segment posts growth in profits after several quarters
The international package delivery segment of UPS posted strong growth in profits on the back of export package growth and favorable impact of currency translation. Asia witnessed growth in export package volumes after several quarters of declines and growth remained positive in Europe as well. As a result, the segment posted nearly 8% y-o-y growth in operating profits. 
A decline in average revenue per package weighs down overall revenues and earnings
However, growth in shipping volumes that resulted in higher revenues at domestic U.S. package delivery segment and enabled higher profits at international package delivery segment was more than offset by declines in average revenue per package across all segments of UPS. As a result, overall revenues and earnings of the company contracted in Q3 on a y-o-y basis. Global economic headwinds pushed shipping prices down with average revenue per package contracting in ground, deferred as well as air-based shipping service in both the U.S. and international segments. Overall, the average revenue per piece declined by 0.8% y-o-y in the U.S. operations and by 1.4% y-o-y in the international operations. 
For the full year 2012, UPS is maintaining an y-o-y earnings growth forecast in the range of 5% to 7%.
We currently have a stock price estimate of $85.23 for the company, approximately 15% above its current market price. We are in the process of incorporating Q3 earning results and will update our analysis shortly.Notes: