The Battle for Value, 2004:

FedEx Corp. vs. The United Parcel

Service, Inc.
Mohd Asraf Bin Abd Wahab (G1514689)
Abdirahman Yasin Mohamed (G1420592)
Nursyahiirah Binti Mohamad Ariffin (G1421266)
Ummu Fathiah Binti Mamad (G1413346)
Group 3: Case Study Presentation
FIN 6265: Financial Statement Analysis
Lecturer: Dr. Hamdino Hamdan
10th March 2016

Presentation Outline
1) Company History
2) FedEx and UPS Company Analysis
3) China Breakthrough and European Market
4) Competition in Express-Delivery Market
5) Capital expenditure
6) Ratio Analysis
7) Company of Our Choice

1) FedEx History

Idea from Fred Smiths undergraduate term paper for Yale University
economic class (1962-1966)

Instead of using cargo space on passenger airlines, Fred wanted to

purchase planes and utilize hub-and-spoke distribution pattern

In 1971, with $4 million inheritance and $91 million venture capital, Federal
Express Corporation was founded

Only in 1976 start making +$3.6 million profit

$1 billion revenue by 1983, $22.5 billion in 2003.

1) UPS History

Founded in 1907 by Jim Casey in Seattle, Washington

Initially was a bicycle-messenger service, before merging with Motorcycle

Delivery Company. Focus on department-store deliveries

Became United Parcel Service of America in 1929 and began shipping

packages on commercial airlines

Largest package-delivery company in the world

$33.4 billion revenue in 2003 (1.5x FedEx)

1) Key facts on both companies

2003

FedEx

UPS

50,000

88,000

625

583

Employee

216,500

360,000

Asset

$15.4 bn

$28.9 bn

Revenue

$22.5 bn

$33.4 bn

Net Income

$830 mn

$2.9 bn

Ground Vehicles
Aircraft

2) SWOT Analysis on FedEx

Strengths

Weaknesses

Very strong in overnight document

and package delivery Absolutely,
positively overnight
Larger air fleet than UPS
Just-in-time (JIT) inventory
management
Brand image
Focus on technology advancement
and product innovation

Opportunities

Lack of ground transportation forces

Costly technological innovation
Lower rated at BBB

Threats

Alliance with USPS

Expanding China market

Online consumer services

Foreign competition entry into home

UPS is catching up in terms of
technology advancement
Unit cost is not the lowest among
industry players
US domestic express market
reached maturity

2) SWOT Analysis on UPS

Strengths

Weaknesses

Great financial strength (AAA)

Largest parcel delivery company in
the world
Strong ground forces
Higher sustainability (stable) and
ongoing expanding network
High operating margin and dividend
Lowest unit cost among industry
players

Largely unionized labor force (64%)

High labor cost
Less innovative
Limited flexibility as the company is
big, bureaucratic and normally an
industry follower

Opportunities

Threats

Global business growth Europe and

China
Expanding business by increasing
logistic end-to-end solutions
Increase profit margin by having more
price control

Intense competition domestically

Lagging FedEx in China
Possible employee strike - in 1997,
loss of USD700mio in revenue due to
190,000 teamsters strike

3) FedEx vs. UPS, who is the winner?

UPS, FedEx and S&P 500 Price Patterns - June 2003 to June 2004
1.25

US-China begin air-transportation

agreement negotiation

1.20
1.15
1.10
Index1.05
(18-Jun-03 1.00)

1.00

% changes:
FedEx = +16.3%
UPS = +3.0%
S&P 500 = +0.3%

0.95
0.90

3) Competition in China
FedEx

UPS

11 weekly flights to China

6 weekly flights

Flew directly to Beijing, Shanghai and

Shenzhen

Flew directly to Beijing and Shanghai

Serving 220 Chinese cities

Serving 200 cities

50% growth in volume between 2003 2004

60% growth on its US Shanghai traffic

between 2001-2004

Jun 2004 US signs with China air-transportation agreement

1. 195 new weekly flights to China up for grab. Ability to serve any
Chinese cities
2. China export-import market = $1 billion
3. China domestic parcel market = $800 million
4. China will become 2nd largest economy by 2015 & largest by 2039.
5. Air cargo in China CAGR = +30% from 2004-2009 while inter-Asia
trade CAGR = +16.8% through 2005
6. As US market already saturated, China is the new growth area
9

3) The European Market UPS larger than FedEx

In 1992, FedEx sold operations to DHL after sustaining an estimated $1
Billion in losses since 1984.
FedEx continues to deliver throughout Europe, however, leveraging
local partners.

UPS enters the European market place in 1988.

Acquires 10 local providers.
Announces $1 Billion of investments in that market
Targets to grow European business to 1/3 of total operations.

10

3) Revenue in Domestic vs. International Market

FedEx and UPS Revenue by Market
100%
80%
60%

FedEx % of international
revenue is going down

UPS % of international revenue

is going up

40%
20%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
FedEx U.S. domestic
UPS U.S. domestic

11

FedEx International
UPS International

4) Competition in Express-Delivery Market

Weight

Mode of Delivery

Time

0 - 2.0 lbs Documents

Air

Overnight

2.0 - 7.0 lbs Packages

Ground

2-day (deferred
delivery)

> 7.0 lbs Freight

3-day
4 day (regular delivery)

US domestic package-delivery = $45 billion

Air express segment = $25 billion
FedEx = Almost all revenue are from air-express
UPS = only 22%

1. Customer Focus
Both companies offer customized solutions rather than standardized products
2. Price competition
UPS cut FedEx overnight letter price by half when first entered the market

12

4) Competition in Express-Delivery Market (cont)

3. Operational engineering
Reduction of unit costs via economies of scale and increasing efficiency
4. IT

FedEx used COSMOS (Customer, Operations, Service, Master On-Line System)

which logs packages data online. Customers can track packages online
UPS used DIADs (Delivery Information Acquisition Devices) Handheld units
drivers used to scan barcode on packages

5. Service Expansion
FedEx offers volume discount at superb quality
UPS added more drop-off boxes and began Saturday pickups
6. Logistic Services
Total solutions - Order entry, warehousing, inventory accounting and account
receivable.
FedEx serves Laura Ashley, UPS manages Dell and Amazon
13

4) UPS DIADs over the years

14

5) Capital Expenditure as a result of intense competition

between the two companies

Between 1992 2003, FedEx and UPS matched each others investments
in capital almost exactly.
Capex rose at annualized rate of 34.64% (FedEx) and 36.78% (UPS)
15

UPS 1
FedEx 0

6) Ratio Analysis - Net Profit Margin

Net Profit margin

A measure of profitability. A low profit margin indicates a low margin of safety: higher risk
that a decline in sales will erase profits and result in a net loss, or a negative margin.
Profit margin is an indicator of a company's pricing strategies and how well it controls
costs
Formulas
Net Profit Margin = Net Profit / Revenue
12%
UPS
have higher net profit margin so better cost controlling
10%
8%
6%
4%
2%
0%
-2%
1992

FedEx
UPS

1993

1994

1995

1996

2002

2003

FedEx
UPS
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-1.5% 0.7% 2.4% 3.2% 3.0% 3.1% 3.2% 3.8% 3.8% 3.0% 3.5%
3.1% 4.6% 4.8% 5.0% 5.1% 4.1% 7.0% 3.3% 9.9% 7.8% 10.2%

2003
3.7%
8.7%

16

1997

1998

1999

2000

2001

UPS 2
FedEx 0

ROA
Return on Assets
The higher the return the better the profit performance for the company
Formula:
Net Income / (Fixed Assets + Net Working Capital)
UPS gain higher ROA in recent years
16%
14%
12%
10%
8%
6%
4%
2%
0%
1992

1993

1994

1995

1996

1997
FedEx

FedEx
UPS

1998

1999

2000

2001

2002

2003

UPS

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1.6% 4.4% 6.5% 7.1% 6.8% 6.5% 6.9% 7.3% 7.3% 5.7% 6.4% 6.3%
6.5% 9.1% 9.1% 9.2% 8.7% 7.2% 11.7% 4.9% 14.6% 10.7% 12.7% 10.4%
17

UPS 3
FedEx 0

ROE

Return on equity
Measures the rate of return on the ownership interest of the common stock owners. It
measures a firm's efficiency at generating profits from every unit of shareholders' equity.
ROE shows how well a company uses investment funds to generate earnings growth
ROE at 15%-20% considered as good.
UPS gain better ROE in recent years
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
1992

FedEx
UPS

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

FedEx
UPS
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-7.2% 3.2% 10.6% 13.3% 12.0% 12.2% 12.7% 13.5% 14.4% 9.9% 10.9% 11.4%
13.9% 20.5% 20.3% 20.3% 19.4% 14.9% 24.3% 7.1% 30.1% 23.4% 25.6% 19.5%
18

UPS 3
FedEx 1

Sales Growth
Although UPS revenue is 1.5 times larger than FedEx, FedEx revenue growth is
better than UPS
FedEx have higher long term sales growth at 11.5% vs. UPSs 7.3%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1993

1994

1995

1996

1997

1998

FedEx

FedEx
UPS

1993 1994 1995 1996 1997

10.76
12.13
3.42% 8.60%
% 9.39%
%
10.08
19
7.65%
% 7.51% 6.29% 0.40%

1999

2000

2001

2002

2003

UPS

CAGR
(921998 1999 2000 2001 2002 2003 03)
37.79
% 5.67% 8.84% 7.52% 4.98% 9.12% 11.53%
10.37
10.05
% 9.13%
% 2.94% 2.04% 7.08% 7.32%

UPS 4
FedEx 1

WACC
WACC
A companys assets are financed by either debt or equity, as an increase in WACC
notes a decrease in valuation and a higher risk.
Formula
WACC = [Kd(1-t) x D/(D+E)] + [Ke x E/(D+E)]
UPS gain lower WACC in the recent years
15%
14%
13%
12%
11%
10%
9%
8%
1992

1993

1994

1995

1996

1997
FedEx

1998

1999

2000

2001

2002

2003

UPS

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
FedEx 11.0% 9.7% 11.6% 11.2% 12.6% 12.6% 12.1% 11.6% 11.8% 11.4% 11.5% 10.4%
UPS
14.2% 12.6% 13.3% 12.7% 12.5% 12.1% 11.3% 12.0% 12.1% 11.2% 10.6% 9.0%
20

UPS 5
FedEx 1

EVA (Annual)
Economic Value Added:
A measure of a company's financial performance based on the residual wealth
calculated by deducting cost of capital from its operating profit (adjusted for taxes on a
cash basis). (Also referred to as "economic profit".)
Formula
EVA = Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)
UPS gain higher EVA in recent years
$1,200
$1,000
$800
$600
$400
$200
$0
-$200
-$400
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

FedEx
UPS

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
FedEx ($261) ($246) ($154) ($115) ($219) ($215) ($102) ($190) ($151) ($396) ($373) $170
UPS
($70) ($17) ($158) $217
$74 ($138) $405 $949 $881 $599 $392 $1,195
21

UPS 6
FedEx 1

MVA

Market Value Added:

The higher the MVA, the better. A high MVA indicates the company has created
substantial wealth for the shareholders. A negative MVA means that the value of
management's actions and investments are less than the value of the capital contributed
to the company by the capital market (or that wealth and value have been destroyed)
Formula: MVA = companys market value invested capital
UPS gain higher MVA in recent year so UPS management can create value to the
company more than Fedex
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

FedEx
UPS

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
$11,67
$11,81
FedEx $625 $1,011 $2,350 $1,117 $1,783 $3,056 $5,492
0 $5,313 $5,993 $9,542
6
$10,77 $11,19 $14,72 $71,06 $56,92 $50,82 $58,38 $69,31
UPS $7,287 $8,090 $8,983 $9,81222
2
5
3
4
8
0
4
5

UPS 7
FedEx 1

Stock Price, Dec 31st

The value of the company are also reflected in the stock prices.
Earlier slide shows FedEx outperformed UPS over 2003-2004 period (on China news),
but over 1999-2003, UPS stock prices are consistently higher than FedEx.
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
FedEx

UPS

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
$10.1
FedEx
9 $12.25 $19.13 $14.97 $19.16 $26.19 $32.06 $54.81 $35.50 $40.00 $53.95 $63.98
UPS $9.25 $10.38 $11.75 $13.13 $14.63 $15.38 $20.00 $69.00 $58.75 $54.50 $63.08 $74.55
23

UPS 8
FedEx 1

Dividend per share

Dividend Per Share
Dividends are a form of profit distribution to the shareholder. Having a
$1.80 growing dividend per share can be a sign that the company's management
believes that the growth can be sustained.
$1.60 Formula
$1.40 Dividend Per Share = Dividend / No. of Shares
$1.20

Dividend per share of UPS higher than FedEx with growing rate.

$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
FedEx

UPS

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
FedEx $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.20
UPS $0.25 $0.25 $0.28 $0.32 $0.34 $0.35 $0.22 $0.58 $0.68 $0.76 $0.76 $0.92
24

UPS 8
FedEx 2

P/E

130.0

P/E Ratio
The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that
measures its current share price relative to its per-share earnings. Lower P/E
means undervalue company or the company is doing exceptionally well
relative to its past trends
Formula
P/E = Market Value per Share / Earnings per Share

110.0

FedEx P/E is better than UPS since 1999

150.0

90.0
70.0
50.0
30.0
10.0
1993
-10.0

1994

1995

1996

1997
FedEx

1998

1999

2000

2001

2002

2003

UPS

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
FedEx
50 20.96 11.36 14.22 16.79 18.7 25.73 15.04 19.8 22.67 22.93
UPS 14.82 14.42 14.34 14.55 18.64 12.58 87.34 23.13 25.59 22.21 29.01
25

UPS 9
FedEx 2

Cumulative Compound Annual Return

Both FedEx and UPS have annual return higher than Standard and Poors 500 index but
UPS
have higher annual return compare to FedEx in recent years.
800%
700%
600%
500%
400%
300%
200%
100%
0%
1993

1994

1995

1996
FedEx

1993
FedEx
20%
UPS
12%
S&P
500
7%

1997

1998

UPS

1999

2000

2001

2002

2003

S&P 500 Index

1994
88%
27%

1995
47%
42%

1996
88%
58%

1997
157%
66%

1998
215%
116%

1999
438%
646%

2000
248%
535%

2001
293%
489%

2002
430%
582%

2003
528%
706%

5%

41%

70%

123%

182%

237%

203%

164%

102%

155%

26

7) Company of Choice UPS!

Overall, UPS has superior financial ratios, higher dividend and is
relatively stable and trusted company for years.
Return on Assets
Return on Equity
WACC
Economic Value Added
Market Value Added
Net Profit Margin
Dividend

The first 6 ratios show the effectiveness

of management in creating value in the
company which later are reflected in the
Stock Prices and Annual Return. The fact
that UPS offer higher dividend than
FedEx added further the appealing factor
of UPS.

27

Morningstar also corroborates our choice

UPS: 6 green bars

when compared to
industry average

FedEx: Only 3
green bars

28

Source: Morningstar.com
5 March 2016

Bonus: Actual share prices since 2004: FedEx

surprisingly outperformed UPS
UPS, FedEx and S&P 500 Price Patterns - June 2004 to Mar 2016
2.50

2.00

1.50
Index
(18-Jun-04 1.00)
1.00

0.50

0.00

FedEX

29

UPS

S&P 500

Some possible explanations

FedEx has better EPS over the years due to lower number of shares
outstanding
FedEx has higher perceived growth via consistent increase in its revenues
FedEx rating was upgraded to BBB+ from BBB in 2012. UPS is already at
AAA.
FedEx has wider presence in China compared to UPS
FedEx big acquisition of TNT Express NV announced in April 2015 was
viewed positively for its future earnings
Slump in crude oil prices (FedEx has bigger air fleet than UPS), and
lower pension expenses improved FedEx quarterly performance
On a side note, FedEx sponsors UEFA Europa League, tennis ATP World
Tour and major golf tournament (hence superior publicity than UPS)
The bottom line: It depends. If you want a quick and higher beta stock, then
FedEx is the stock for you. But if youre looking for a solid, long-term
investment, then UPS is the way to go.

30

Thank you and Q&A

31