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UPS second-quarter profit tops estimates; sees sluggish U.S. economy

An airplane is seen on the tarmac at the United Parcel Service (UPS) Regional Air Hub in Rockford, Illinois, December 9, 2014. REUTERS/Jim Young

By Nick Carey

(Reuters) - Package delivery company UPS (UPS.N) on Tuesday reported a better-than-expected second-quarter profit on improved margins, and said U.S. economic growth was being hampered by a strong dollar and an expected interest rate hike.

Shares in Atlanta-based United Parcel Service Inc rose more than 2 percent.

"The continued strength of the U.S. dollar and I think this impending rate hike by the Fed appears to be holding back some U.S. growth," Chief Executive Officer David Abney said on a conference call.

Abney said UPS remained "a little bit cautious about the U.S. economy."

Like main rival FedEx Corp (FDX.N), UPS is often seen as a bellwether of U.S. economic health. An interest rate hike is widely expected this year.

UPS revenue fell 1.2 percent from a year ago to about $14.1 billion in the quarter. UPS said the strong U.S. dollar and lower fuel surcharges hurt growth. When reporting quarterly results in June, Memphis-based FedEx said lower fuel surcharges had cut into revenue.

UPS reported second-quarter net income of $1.23 billion, or $1.35 per share, up nearly 10 percent from $1.12 billion, or $1.21, a year earlier.

Analysts, on average, expected earnings per share of $1.26.

The company forecast full-year 2015 earnings per share in a range from $5.05 to $5.30, unchanged from April, though the company added that it would be at the high end of its outlook.

Analysts, on average, expect full-year earnings per share of $5.19.

Despite the second-quarter earnings beat, analysts and investors were waiting to see how the company performs in the fourth-quarter holiday season. In 2014 the company overspent for package volumes that failed to materialize after underestimating demand in 2013, when hundreds of thousands of packages were stranded on Christmas Eve.

"UPS must still focus on overcoming the previous year's problems in peak shipping to hit their (earnings) targets for the year," Cowen & Co analyst Helane Becker wrote in a client note.

Volume growth and price increases boosted margins at its international package business.

The strong dollar drove down revenue for its higher-margin international package business by more than 6 percent, while revenue in the U.S. domestic package market, by far its largest business, rose 1.6 percent.

In early trading on the New York Stock Exchange, UPS shares were up 3.5 percent at $98.43.

(Reporting by Nick Carey in Chicago; Editing by Jeffrey Benkoe)