United Parcel Service Inc. (UPS) said on Thursday its quarterly profit rose but missed expectations as shortfalls in its U.S. package business and rising fuel prices offset strength internationally.

Earnings at the world's largest package carrier grew to $890 million, or 78 cents a share, compared with $739 million, or 65 cents a share, a year-earlier. Revenue rose 7.7 percent to $8.95 billion.

Excluding items, UPS earned $791 million, or 70 cents a share, on an adjusted basis in the quarter, compared with $702 million, or 62 cents a share, a year earlier. That was short of analysts' consensus estimate of 71.8 cents a share on revenue of $8.95 billion, according to Reuters Estimates.

UPS shares fell 1 percent in morning trading.

Bear Stearns (search) analyst Ed Wolfe attributed the miss to lower-than-expected revenue from the company's domestic package business, especially air express volume, and worse-than-expected operating margins.

"We have been very focused on when UPS' domestic package margin would begin to show improvement. We had hoped for some more evidence this quarter with a turn next quarter," Wolfe said in a research note.

UPS said revenue in that business grew 4.4 percent and operating profit increased nearly 4 percent. Robert W. Baird (search) analyst Jon Langenfeld in a research note attributed the weakness in the U.S. package business to ongoing internal investments and a weaker September due to storms.

Revenue growth in UPS' other businesses was much stronger, with the logistics business posting 10 percent growth and international seeing 22 percent revenue growth. Worldwide average daily volume increased 3.4 percent, driven by a 13.2 percent increase in total international export package growth.

Morgan Keegan & Co. (search) analyst Arthur Hatfield said at first glance fuel looked like it was also a problem. UPS said it spent $350 million on fuel during the quarter, up nearly 38 percent from a year-ago.

"They have a fuel surcharge in place but earlier this year they changed the surcharge program to have higher surcharge on air and did away with it on ground. That hurt them because ground is half their revenue," Hatfield said.

The company, which also said its board increased share buyback authorization to $2 billion, expects fourth-quarter earnings of 83 cents to 87 cents a share and it expects earnings per share in 2005 to grow 13 to 17 percent from its projection for fiscal 2004 of $2.91 to $2.95 a share.

Analysts, on average, expected earnings of 84 cents a share in the fourth quarter, according to Reuters Estimates.

The company said it is expecting a solid holiday shipping season in the United States and "stellar growth" abroad.

Shares of UPS fell 78 cents to $77.02 on the New York Stock Exchange (search).