Financial management, April 2018 The battle for Value, 2004 FEDEX corp vs UNITED PARCEL SERVICE, INC Financial management, April 2018 Professor: Konan Chan 蔡澂萱 106363008 吳宜軒 106363022 吳幸儀 106363078 詹雅棠 106363080 阮清秀 106363120 余安珮 107363034

CONTENTS 1 Introduction 1-2 Comparison Profitability Analysis 2-2 Capital Use 3 Liquidity 4 Future growth 5 Conclusion

PART I Introduction Case Abstract and Question Set

1 1 2 2 U.S-China Air-service Agreement Case summary Agreement Opportunity U.S-China Air-service Agreement 1 1 Allow additional 195 weekly flights and their carrier to serve any city in the other country 16.8% annual growth inter-Asia trade . China had been growing 30% a year. China export-import market nearly 1 billion. 2 Both being granted a high degree of operating flexibility. 2 Goals ： FedEx’s goal of producing “superior financial returns”, While UPS targeted “a long-term competitive return”. Question： Had the two firms achieved their goals ? Did their financial performance suggest their achievement in strong performance in the future?

FedEx I. Key Strategy： II. Successful reasons： The largest venture-capital star-up (once)： In 1971, Smith invested 4 million, raised 91 in venture capital. I. Key Strategy： Purchasing the planes it required A hub-and-spoke distribution pattern II. Successful reasons： Deregulation Operational strategy Philosophy of “People-Service-Profit”

FedEx：Important stages 1976 1981 3.6 million profits 19,000 daily volume of packages FedEx Fierce industry competition 1983 1 billion revenue 1990s First company ever to win Malcolm Baldrige National Quality Award Future 2003 15.4 billion in assets 830 million net income 22.5 billion revenue

UPS II. Key Strategy： I. Key Success： Known as Big Brown： Founded in 1907. By 1975, has reached a milestone to delivery to every address, and started its international strategy. I. Key Success： Efficiency：every route is time down to the traffic light. II. Key Strategy： Two-for-one stock split Aggressive series of acquisition

1975 1999 1988 2002 2003 UPS：Important stages UPS Future Ｒeach the milestone Delivery to Canada and Germany UPS Two-for-stock split IPO, raising 5.266 billion 1988 Enter European market by acquisition 2002 Domestic：76％ International：15% Nonpackage：9％ Future 2003 Ｗider supply chain industry 3.2 trillion market）emphasis 28.9 billion in assets 33.4 billion in revenue 2.9 billion in profits

PART 1-2 Head to Head Comparison of the two companies.

Fedex v.s. UPS UPS Fedex Ground vehicles 50,000 88,000 Aircraft 625   Fedex UPS Ground vehicles 50,000  88,000 Aircraft 625 583 Full- and part-time employees 216,500 360,000 Freight volume 5.4 million of packages shipped daily. 13 million packages and documents daily. Assets $15.4 billion $28.9 million Revenues $22.5 billion $33.4 million

Express-Delivery Market   Fedex UPS Customer Focus Both carefully meet the customers’ needs and provide customized solutions. Price competition Higher e.g., 2004, Residential premium-express $1.75 Lower e.g., 2004, Residential premium-express $1.40 Information technology Every package was logged into COSMOS. Every package was logged into DIADs. Service expansion Fedex offer volume discounts and better quality. Both offer Saturday pickups and deliveries. UPS copied Fedex’s customer interfaces and Fedex bought $200 million in ground vehicles to match UPS. Logistics services Laura Ashley Dell Computer

Profitability Analysis PART 2-1 Profitability Analysis Use Du Pont system to analyze the key factor which affected both companies’ performance. ROA, ROE, EPS

Profitability Year UPS Fedex ROA ROE EPS($) 2003 10.44% 6.30% 19.51% 11.39% 2.57 2.79 2002 12.73% 6.38% 25.55% 10.85% 2.84 2.38 2001 10.68% 5.74% 23.41% 9.90% 2.13 2.02 2000 14.61% 7.32% 30.14% 14.38% 2.54 2.36 1999 4.91% 7.33% 7.08% 13.54% 0.79

Du Pont Analysis - ROA The asset turnover of Fedex is relatively higher and more stable than UPS. However, the figure of operating profit margin of UPS is nearly twice as much as Fedex. To sum up, UPS outperformed Fedex in operating profit margin, and managed its asset more efficiently. ROA= net income + interest assets = sales x net income + interest assets sales (asset turnover) (operating profit margin) ROA

Profitability Year UPS Fedex ROA ROE EPS($) 2003 10.44% 6.30% 19.51% 11.39% 2.57 2.79 2002 12.73% 6.38% 25.55% 10.85% 2.84 2.38 2001 10.68% 5.74% 23.41% 9.90% 2.13 2.02 2000 14.61% 7.32% 30.14% 14.38% 2.54 2.36 1999 4.91% 7.33% 7.08% 13.54% 0.79

Du Pont Analysis - ROE ROE ROE= net income Equity = sales x net income + interest x assets x net income assets sales equity net income+interest (asset turnover) (operating profit margin)(leverage ratio) (debt burden) As we can see from both figures of leverage ratio and debt burden, UPS and Fedex nearly had the same level of debt pressure, although Fedex used slightly higher financial leverage. In conclusion, UPS had higher ROE than Fedex, and it also had more financial flexibility.

Profitability Year UPS Fedex ROA ROE EPS($) 2003 10.44% 6.30% 19.51% 11.39% 2.57 2.79 2002 12.73% 6.38% 25.55% 10.85% 2.84 2.38 2001 10.68% 5.74% 23.41% 9.90% 2.13 2.02 2000 14.61% 7.32% 30.14% 14.38% 2.54 2.36 1999 4.91% 7.33% 7.08% 13.54% 0.79

Earnings Per Share The EPS of UPS soared from $0.79 to 2.54, which was almost the same standard as Fedex in 2000(the first year after UPS went IPO), then the average EPS of UPS from 2000 to 2003 was $2.52 which was $0.13 higher than Fedex.

Capital Use PART 2-2 WACC,EVA,MVA,STOCK PRICE UPS created more wealth for shareholders than FedEX for having higher WACC, EVA and MVA. Investors used to prefer UPS, but after the agreement, FedEX’s stock price went higher than UPS. WACC,EVA,MVA,STOCK PRICE

Capital Use WACC Analysis Fact Weighted average of cost of capital －debt and equity. Higher WACC means lower valuation and higher risk. Fact WACC of both FedEX and UPS has the tendency of going down. Before 2000, FedEX had lower WACC, while from 2001-2003, UPS had lower WACC. Analysis We believe that UPS had lower risk and shareholders could get higher wealth from it.

Capital Use EVA Analysis Fact A way to measure an operation’s real profitability by taking the total cost of capital into account. Fact FedEX’s annual EVA was negative in every year except 2003, leading to its cumulative EVA was also negative. UPS’s annual EVA was positive every year, and its cumulative EVA showed growth in this time period. Analysis We believe that UPS was using their capital more wisely compared with FedEX during the time. FedEX’s profit couldn’t meet their cost of capital at that time, which might cause financial problems.

Capital Use MVA Analysis Fact The market value a company has created compared with its investment base. Fact UPS’s MVA was dramatically higher than that of FedEX, with the MVA in 2003 of 69315 and 11816 respectively. Analysis We believe that UPS had created higher market value until 2003, and had higher capability in creating wealth for shareholders.

Capital Use STOCK PRICE Analysis Fact Stock price also reflect company’s value from the perspective of investors. Fact The stock price of UPS was higher than that of FedEX from 1999 to 2003. Both companies’ stock price rose after the agreement, but FedEX’s price grew faster and later surpassed UPS. Analysis Before the air-transportation agreement, investors prefer UPS. After the agreement, investors showed higher interests in FedEX, because it had the largest presence in China.

Liquidity & Leverage Analysis PART 3 Analyze both companies’ liquidity ratio and leverage ratio to see which company was more flexible to its financing power. Current Ratio, Cash Ratio, Long-Term Debt/Equity Ratio, Times Interest Earned

Liquidity UPS had both higher current ratio and cash ratio than Fedex. In other words, it had greater repayment capacity and lower default risk than Fedex.

Times Interest Earned: Leverage Debt/Equity Ratio: The figure of UPS reached its peak at 0.5 in 2001, after that, it declined to even slightly lower than Fedex in 2003, whereas the figure of Fedex fluctuated between 0.28 and 0.37, which is relatively stable. Times Interest Earned: The line graph of UPS shows an upward trend during the period. In addition, the figure was almost four-fold higher than Fedex in the last 2 years. Conclusion: UPS had significantly greater financing power than Fedex, and it would have less pressure to get loans on its capital investment.

Future Growth PART 4 Net Income Growth rate, Sales Growth rate Despite UPS is superior to FedEx among many measures about profitability in present financial statement, FedEx might catch up from behind in the future. From the comparison of both sales and NI growth's rates, we predict that FedEx's profitability would be increased much more steadily in the future; moreover, FedEx is bullish for its potential of growth in the international package market. Net Income Growth rate, Sales Growth rate

Future Growth Net Income Growth % UPS IPO lots of acquisitions NI growths % shows how much the net income changes from one period to another. Fact FedEx and UPS both gained an negative NI growth % in 2000-2001. UPS’ NI growth %s are unstable. UPS got a high peak in 1999-2000 but got three negative NI growth % about three years in five years. Analysis Comparing to UPS' unpredictable profit growth, we could predict FedEx's profitability would be increased much more steadily in the future.

Future Growth Sales Growth % Death Cross Fact Analysis There is a death cross between 2000 to 2001. FedEx's sales growth % largely surpassed UPS' until the end of 2003. The international package market is growing; however, the U.S. domestic package market is saturated. From Exhibit 7, we could find FedEx put more efforts on international market than UPS since 1992 Sales Growth % Sales growth % shows the increase in sales over a specific period of time. It is important for an investor to predict the demand for a company's products or services in the future. Analysis We predicted that FedEx would be bullish for its potential of growth in the international package market.

CONCLUSION PART 5 Past financial performance and future expansion Which company is better to invest in? Past financial performance and future expansion Short term, long term decision Facts

Financial performance UPS - Unstable FedEx Lower financial numbers comparing to UPS Lower market share in the sector Pros Pros Higher financial number: ROA, ROE, WACC, EVA, MVA, NPM Higher stock price More liquidity More stable Trend to catch and overpass UPS recently Fixed cost structure Cons Cons

Non-financial index UPS FedEx Pros Pros Cons Cons Lack of foreign market experience Lack of infrastructure to expand foreign market. FedEx - Lack of regional presence for Ground service (insufficient vehicles) Pros Pros Longer time and experience in the delivery service Experience in the foreign market Dominant in the China market Logistic solutions, infrastructure for foreign market expansion. (more aircarfs) Cons Cons

Our decision Short term For short term investment (<5 years), we recommend investors to choose UPS as it it predicted to maintian better financial performance Long term Foreign market – expanding in to China As the domestic market reached maturity, expansion to the foreign market is the must for both companies. For long term investments, we recommend investors to choose FedEx, as the growth of foreign market – FedEx’s strength FedEx already has the infracstrure for foreign market, leading to the capacity to serve additional business with little additional cost.

FACTS Facts Reality has shown that: since 2004, FedEx has gradually overcome UPS in the financial index and until 2014, they have almost the same market share in the globe. market. Fact There is a death cross between 2000 to 2001. FedEx's sales growth % largely surpassed UPS' until the end of 2003. The ackage market is growing; however, the U.S. domestic package market is saturated. From Exhibit 7, we could find FedEx put more efforts on international market than UPS since 1992

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