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UPS (UPS +5%) delivered for investors today as the package delivery giant rebounded from a big miss in Q2 to report nice EPS upside in Q3. Following a huge miss from FedEx (FDX) last month, many investors had concerns coming into this quarter. They were pleasantly surprised. However, it was not all clear sailing as UPS lowered its FY24 revenue outlook to $91.1 bln.

• Revenue rose 5.4% yr/yr to $22.2 bln, a bit better than expected. Importantly, this marked UPS's first yr/yr revenue growth since 3Q22 with all three business segments delivering revenue growth. In its US Domestic segment, its performance was driven by strong volume growth, the highest growth rate in more than three years, and excellent cost management, which resulted in a yr/yr decrease in cost per piece of 4.1%. US average daily volume, or ADV, increased 6.5% yr/yr.
• In terms of product mix in Q3, Ground ADV increased 8.9%, while total air ADV was down 6.3%. UPS continues to see customers shifting down from air to ground and some ground volume is shifting down to SurePost. Within ground, SurePost volume levels rose slightly vs Q2. While SurePost volume comes at a lower revenue per piece, UPS said its algorithm improvements allowed it to redirect more SurePost packages into its own network, driving delivery density.
• On its last earnings call, UPS said that Q2 would not only be the bottom, but a turning point for its performance. UPS said it would return to revenue and profit growth in Q3 and UPS did just that. Nevertheless, UPS conceded that it faced a macro environment in Q3 that was slightly worse than expected. In the US, online sales slowed and manufacturing activity was lower than anticipated. This slowdown in manufacturing was also true outside of the US.
• Looking ahead to the all-important holiday season in Q4, UPS noted that this year's holiday season has only 17 shipping days between Black Friday and Christmas Eve. There has not been such a compressed peak since 2019. To prepare, UPS has been collaborating with customers on daily volume expectations and the timing of their promotions. While UPS customers are still expecting a good holiday selling season, recently, shippers have tempered their volume expectations.

Given all the doom and gloom from UPS's Q2 EPS miss and the big miss we saw from FedEx last month, investors are quite excited and likely surprised to see such a good quarter from UPS today. What really stood out were the comments about strong volume growth in the US Domestic segment, the highest growth rate in more than three years. With that said, UPS seemed a bit cautious on Q4 as some shippers have tempered their volume expectations in Q4 given the compressed peak season this year.