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Battle of Value
FedEx vs. UPS
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2/19/2016

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The landmark air-transportation agreement between the United States and China on June 18, 2004 led to
liberalization of air traffic between two nations and opened up massive opportunities for package-delivery global
majors FedEx Corporation (FedEx) and United Parcel Service, Inc. (UPS), the only U.S all-cargo carriers then
permitted to serve Chinese market. Stock prices of both companies had been rising steadily since the time both
countries started negotiations on the subject, with FedEx taking lead over UPS with its share prices rising five times
faster than the latter, given formers largest foreign presence in China in terms of number of weekly flights. Through
this report an attempt is made to answer the following questions in terms of recommending preferred choice of
investment between the two companies for an investor. A) Financial problems which can become the basis
for recommendation. B) Brief on key issues or factors that require analysis for building recommendations. C) Final
recommendation.
Financial Parameters

UPSs revenue growth has been slower than FedEx; but outside US, UPS is growing faster than FedEx: FedEx

is growing aggressively leaving behind UPS in terms of revenue growth. Since 1992, FedEx grew at a CAGR of

11.5% vs. 7.3% by UPS. FedExs US revenue grew at CAGR of 11.54%, whereas revenue from international market

grew by 7.5%. During the same period, UPSs revenue from US grew at CAGR of 5.7% but revenue from

international market grew at CAGR of 12.4% and hence gives confidence of UPSs ability to capture Chinese

opportunity. UPS was also very active in growing inorganically outside the US through M&A and strategic tie-ups.

UPSs was operating at far better margins compared to FedEx: Between 1992 and 2003, average operating

margins delivered by UPS was 10.99% and net margins was 6.12% whereas, FedEx during the same period was

operating at barely 5.98% and 2.64% respectively. This reflects long term competitive advantage being enjoyed by

UPS despite aggressive growth in revenue by FedEx. This was even better for UPS since the time they went public

in 1999. Avg for last five years for UPS was 13.72% and 7.96% respectively whereas for FedEx it was 6.4% and

3.53% respectively. This tells us that while FedEx may continue to outperform in revenue terms, UPS will deliver

superior margins and hence may be favored by the investors.

FedEx outpaces UPS in terms of delivering better working capital efficiency and asset turnover: Operational

excellence by FedEx was reflected in its working capital management reflected by nearly constant average days

outstanding at 40 to 45 days of sales and much higher levels of inventory turnover. However in case of UPS the

average days outstanding had been on a continuous rise from 23 days in 1992 to 52 days in 2003. Working Capital

turnover reduced from 268 times to 8 times during the same period. Also on the asset turnover side, while FedEx

saw improvement (from 2.2 to 2.6), UPS saw the deterioration (from 2.6 to 2.4).

Both companies are at loggerheads to outpace each other and invest same in capital expenditure: Intense

competition in the industry and fierce one-upmanship occurring between FedEx and UPS was reflected in their

respective capital expenditure in future growth. Between 1992 and 2003, the capital expenditures of both entities

grew at CAGR of 35% and 37% respectively. Also both these companies nearly matched each others capital

investments. The scenario is expected to remain similar given the opportunity being opened up in China.
UPS had been delivering better return on its stock price and EPS vs. FedEx: UPS had been delivering superior

returns over broader market index S&P500 since the time it went public in 1999 and had been outperforming FedEx

by a significant delta. This is a clear reflection of higher margins been delivered by UPS and super normal growth in

EPS which was at annualized 34% since 1999. FedEx in comparison delivered lower margins and barely 7%

annualized growth in EPS during this period. However, over longer term since 1993, the growth by FedEx was at

annualized 27% vs. 13.9% by UPS. But given UPS super performance over last four years and its philosophy of

targeting long-term competitive return it should deliver better performance than FedEx.

UPS had created far more wealth for its shareholders than FedEx: FedEx with all its innovation, customer

focus, and operational efficiency failed to create economic value for its shareholders compared to UPS. FedEx had

always generated return on net assets lower than its cost of capital (WACC) and as a result had always generated

negative economic value. Overall the company had generated a negative economic value of $2.25 billion between

1992 and 2003. Whereas UPS on the other hand because of better profitability had always generated return on assets

higher than its WACC and hence added positive economic value. During the same period UPS generated economic

value addition of $4.33 billion. However, FedEx market value addition went up by nearly 20 times between 1992

and 2003 vs. nearly 10 times for UPS. But the same should be looked in perspective that growth in FedEx came on a

lower base.

Other non-financial factors

Strategy and Approach to business and its benefits: FedEx has an innovative, entrepreneurial and operational

leadership approach and focuses on building technology excellence and superior customer experience through

timely delivery. Its philosophy of People-Service-Profit relies on employee participation, customer satisfaction and

total quality management. This had a large positive impact led by optimized operation and hence lower cost. Besides

focus on customer experience builds trust and hence helps in growing sustainable business in a market which was

always dominated by UPS. UPS, on the other side, had a reputation for being big, bureaucratic and industry

follower. Although they claim to maintain focus on quality for providing customer satisfaction but their major focus

was on remaining as industrys lowest cost service provider. UPS always laggard in terms of adopting best

technology and taking industry first step. In short, UPS always followed FedEx in terms of its approach to business

and hence always remains a slow starter. This is the reason why FedEx was successful in acquiring many large
clients which used UPSs services. It was only in 1999 when UPS went for IPO, it changed its strategy and started

focusing on technology and innovation to catch up the market.

Choice of Product and underlying opportunity: While UPS, being a traditional player, was present across all

segments of package-delivery market which was worth $45-billion in the US, FedEx owns the express delivery

market and derived virtually all of its revenue from air-express segment which was worth $25-billion market in the

US. UPS derived only 22% of its revenues from express-delivery. Although both are dominant players in the US

market, stiff competition and increasing number of players had left with less opportunity for growth and hence focus

shifted to go global for both the players. FedEx through its innovative business model carved a niche for itself which

helped the company to grow faster than competition in terms of revenues. UPS on the other side had managed to

diversify its business by deriving 9% of its revenue from non-package segment which is nil in case of FedEx. This

reduced its dependence on the US market.

Market Presence and success outside domestic market: UPS was founded in 1907 and become the largest

package-delivery company in the world as well in the US. Throughout 20th century UPS had been predominantly the

US service provider until 1975 when it made its first delivery to Ontario, Canada followed by West Germany in

1976. By 2003, UPS offered services throughout the US and in more than 200 countries and territories. In 2003,

UPS derives 19.5% of its revenue from market outside the US. FedEx was found in 1971 and became the largest

revenue generating air-delivery company in the US by 1981 and by 2003 it derives 23.2% revenue from the market

outside the US. FedEx aggressive approach to business had also resulted in wrong decisions and Europe was a case

in example where the company lost $1 billion since its entry in 1984 through 1992 when it relinquished its hub and

started relying on local partners for service.

Presence in China and ability to take advantage: FedEx had the largest foreign presence in China through 11

weekly flights and served 220 Chinese cities. FedExs volume in China had grown by over 50% between 2003 and

2004. UPS, despite been present in China since 1988, laggard FedEx in terms of its penetration and was operating

through 6 weekly flights besides serving nearly 200 Chinese cities. This is one major reason why FedEx share price

rose five times faster than UPS during the development of air-transportation agreement between the US and China.

With expectation of China becoming world second largest economy over next decade, the agreement between two

nations and resulting opportunity will be a real litmus test between both players. FedEx had major advantage over
UPS in terms of presence in China and given its fixed cost structure, the former has better chances to exploit this

opportunity at lower incremental cost. However FedExs advantage comes with a caveat that its aggressive approach

Recommendations

UPS outperforms on almost every financial parameters compared to FedEx, except revenues, but on many of the

non-financial parameters the latter outperformed. Though UPS had been laggards in terms of increasing its

penetration but over last few years the company had been active in terms of chasing growth and hence is investing in

right direction. This had resulted in significant delta in the terms of share price return over broader index and also

superior return over FedEx. Given UPS approach to business to grow organically in the US and inorganically in the

international market will help UPS to outperform FedEx in the long run. In the short run, FedEx had also seen major

appreciation in its share prices in expectation of resulting benefit out of opening up of China market for the US but

over a period of time, valuation will catch up the real business performance where the odds are in favor of UPS.

Hence one should invest in UPS.

Appendix

1. Segmented Revenue (USD Million)

2. Margins
FedEx 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 11-Yr Avg 5-Yr Avg
Operating margins 3.67% 4.67% 6.26% 6.29% 6.07% 5.94% 6.82% 6.93% 6.69% 6.09% 5.74% 6.54% 5.98% 6.40%
Net Margins -1.51% 0.69% 2.41% 3.17% 3.00% 3.14% 3.17% 3.76% 3.77% 2.98% 3.45% 3.69% 2.64% 3.53%

UPS 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 11-Yr Avg 5-Yr Avg
Operating margins 7.74% 8.20% 7.95% 10.29% 9.07% 7.56% 12.47% 14.73% 15.19% 12.69% 12.81% 13.16% 10.99% 13.72%
Net Margins 3.12% 4.55% 4.82% 4.96% 5.12% 4.06% 7.02% 3.29% 9.86% 7.83% 10.18% 8.65% 6.12% 7.96%
3. Working Capital Efficiency and Asset Turnover
UPS

FedEx
4. Capital Expenditure

5. FedEx and UPS stock prices and EPS

6. FedEx EVA and MVA

7. UPS EVA and MVA

8. Competitive developments