the battle for value: fedex v.s. ups

The Battle for Value: FedEx v.s. UPS

指導教授：姜堯民

小組成員：

91 金融

91932203

譚經文

93 金融

93932217

利翠瑤

93 金融

93932206

陳怡珣

93 金融

93932205

張財育

Financial Management Case Study: Risk & Return

NCCU EMBA 2004, Fall

91 金融譚經文上海商銀總稽核

93 金融陳怡珣台灣金融研訓院

93 金融利翠瑤上海商銀永和分行經理

93 金融張財育元大京華證券總經理室協理

小組成員介紹

Financial Management Case Study:

Risk & Return NCCU EMBA 2004, Fall

•FedEx & UPS dominated 19 billion air-express market

•1995 年 7 月 10 日 J.C. Penny 宣佈與 UPS 簽定一紙價值 10 億美金的五年運送合約

•這一項宣布讓 FedEx 股價下跌 2.33% ，市值減少 $85m.

•對強調品質與創新的 FedEx(1) 而言，是否意味傳統上被認為大型而僵化的 UPS ，將成為其主要競爭者 ?

Fact of 1995

(1).1990 獲得 Malcolm Baldgrige 國家品質獎

• Intensifying efforts at products innovation, quality, and reengineering

• High and rising investment in the business

• Shift market share

Market Challenge at 1995

Fred Smith Founder, Chairman and CEO of Federal Express Corporation

• Known as the "father of the overnight delivery business"

• The Marine Corps veteran who teetered on the verge of bankruptcy is one of American business's greatest success stories

“father of the overnight delivery business”….

versus

Some Key Financial Ratio, 1994

0.00

1.00

2.00Average Days outstanding

Current ratio

Debt/equity ratio

Net profit margin

FedEx UPS

Compare_Financial Ratio 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994Activity AnalysisFixed assets turnover_FEDEX 164.00 178.00 186.00 190.00 182.00 200.00 214.00 215.00 227.00 245.00Fixed assets turnover_UPS 3.28 3.26 2.84 2.53 2.42 2.44 2.54 2.64 2.71 2.69

Appendix Exhibit 1.2

Risk & Return

FedEx UPS S&P 500

Avg. Annual Return 1982 ~ 1994 (%) 10.37% 34.93% 15.44%

Cumulative Return 1982 ~ 1994 (%) 92.80% 3907.31% 506.63%

-60%

0%

60%

120%

1982

1984

1986

1988

1990

1992

1994

FedEx aunnual return s&p 500 annual return

UPS annual return

-1000%

0%

1000%

2000%

3000%

4000%

1982

1984

1986

1988

1990

1992

1994

FedEx compare S&P UPS compare S&P

Compare Annual Return Net Cumulative Return with S&P 500

Appendix exhibit 7

FedEx UPS S&P 500

Avg. Annual Return 1982 ~ 1994 (%) 10.37% 34.93% 15.44%

Adjusted return with 29.94% 294.84% 135.69%

* Assumption Rf= 7.43% (30 year US G. bond rate of 1994)

Risk & Return

FedEx UPS

Intercept -2.13% 28.17%

Jenson’s * -3.54% 24.01%

Risk & Return

Data:1982~1994 FedEx UPS

0.81 0.44

R2 0.077 0.038

Appendix Exhibit 9,10

Appendix Exhibit 7

Data:1994 FedEx UPS

1.25 1.05

Unlevered 0.74 0.96

• Top down Beta vs. Bottom up Beta• VaR = Pclose ． Volatility() ． C.L.*

*95%:1.645 ;99%:2.236

Return on Invested Capital

NOPAT/Invested (beginning) Capital


0%

5%

10%

15%

20%

25%

30%

35%

40%

19

85

19

87

19

89

19

91

19

93

FedEx UPSmm 1985 1994

FedEX

NOPAT 235 403

Begin capital 1,403 6,835

Rate of return 16.75% 5.90%

UPSNOPAT 832 1,033

Begin capital 2,334 7,919 Rate of return 35.65% 13.04%

0.00%

20.00%

40.00%

1 2

FedEx

UPS

Cost of Invested Capital

0%2%4%6%8%

10%12%14%16%18%

19

85

19

87

19

89

19

91

19

93

FedEx UPS

WACC

mm 1985 1994

FedEX

Yield of senior BBB 12.19% 8.91%

Cost of equity 18.03% 14.18%

Cost of capital 14.92% 9.86%

UPSCost of debt(AAA) 10.93% 7.80%




WACC= E/V * Re + D/V * Rd(1-Tc)

Re : cost of equityRd : cost of debtE : market value of equityD : market value of debtTc : tax rateV : D+E

Assumption Risk Premium: 5.4%

Economic Value Added

-10%

-5%

0%

5%

10%

15%

20%

25%

19

85

19

87

19

89

19

91

19

93

FedEx UPS

-600

-400

-200

-

200

400

600

1985

1987

1989

1991

1993

EVA_FedEx EVA_UPS

Net Return on Invested Capital

EVA: NOPAT- (Invested Capital x Cost of Capital)

Market Value Added

FedEX

Analysis of market nalue added 1985 1994 change Book value of equity 815 1,925 1,110 Interest bearing debt and equivalents 1,014 3,398 2,384 Capital (book value) 1,829 5,323 3,494 Market value of equity 2,724 3,193 468 Interest bearing debt and equivalents 1,014 3,398 2,384 Capital (market value) 3,738 6,591 2,853 Market value added 1,909 1,268 641-


UPSAnalysis of market nalue added 1985 1994 change Book value of equity 2026 4647 2,621 Interest bearing debt and equivalents 537 1,996 1,459 Capital (book value) 2,563 6,643 4,080 Market value of equity 5,575 13,630 8,055 Interest bearing debt and equivalents 537 1,996 1,459 Capital (market value) 6,112 15,626 9,514 Market value added 3,549 8,983 5,434

75% FedEx 的股票為法人持有，咸信分析師的看法對股價會有影響，以下是 1995 年中一些分析師對 FedEx 的看法 • • •

『 FedEx 股價近期的弱勢，對我們來說像是一種普遍大眾對經濟及對航空快遞市場的關注。 • • •也使得憂心 FedEx 可能沒有辦法藉由提高價格來扭轉國內所得的減少。而近期美日貿易緊張局勢• • •可能給投資人增加持股的憂慮。 • • •我們維持對 FedEx 股價低於市場表現 (underperformance) 的評等• • • 。』

『 FedEx 國內營運的利潤下降， FedEx 正在努力調整利潤下降的業務。我們期盼 1996 年問題能有所改善• • • ，同時，國際的部分正在逐漸增強• • • ，空運業也正努力的開發進入廣大的亞洲市場。以FedEx 逐漸全球化的網絡為基礎，評等中立 (neutrally ranked) 的 FedEx 股票• • •

『國內市場的表現讓人失望 • • •國內營運的利潤從去年的 6.7% 被縮減到 4. 2% 。生意轉向低單價運送業務需要更快的成本節省是高於其能力的• • • 我們正在提高其未來的評價，因為國際市場的表現我們預期能繼續抵銷其國內營運收入的惡化。對於 FedEx 我們持續給普通股評價買進 (Buy) 。』

It seemsBetter than

But …

What nowadays ?

versus

The Express Industry(1)

• DHL, FedEx, TNT & UPS represent 85% of

industry

• $70 billion revenues

• In excess of 4.5 billion annual shipments

• 635,000 people

• 1500 aircraft

• Operate in 220 countries

(1). Best Practice and Benchmarks: A Workshop With the Royal Customs Malaysia

Kuala Lumpur Dec. 2-3, 2003Irma Hardjasatya (FedEx Express)

DHL remains the leading international express company with about a 33% market share, followed by FedEx (21% share), UPS (18% share), TNT (12% share) and EMS (7% share).

Intl Air Express Shipment Growth

DHL’s acquisition of Airborne Express in August 2003 dramatically altered the landscape of the U.S. air express business.

Estimates that DHL now has an 18.4% share of the U.S. domestic air express market (see table below), however it will only be able to grow by taking business from FedEx and UPS.

In fact, the slow growth in demand for air express services means that the main competitors in the U.S. market are seeking to expand their surface delivery capabilities, and to generate more business in the growing international express sector.

• Overall revenues for the U.S. domestic air freight and express industry in 2003 totaled $27.8 billion, a figure that was up about 2% from 2002.

• The integrated express companies (FedEx, UPS, DHL/Airborne, Menlo Forwarding and BAX Global) as a group generated $25 billion (90%) of the industry’s total revenue in 2003.

U.S. Domestic Air Express Industry

U.S. Domestic Air Express TrafficDaily Shipment Count – (4th Quarter 2003)

Air Express Company Daily Volume

Market Share

FedEx 2,828,000 42.5%

United Parcel Service 2,336,000 35.1%

DHL 1,224,000 18.4%

USPS Express Mail 218,800 3.3%

Other (incl. BAX Global and Menlo) 50,000 0.7%

Total 6,656,800 100%

Note: Data represent purely domestic traffic only.Source: Air Cargo Management Group research as contained in the U.S. Domestic Air Freight Express Industry Performance Analysis, 2004

Domestic Market Share

FedEx Express FedEx Express

FedEx Trade Networks

FedEx Ground FedEx Ground

FedEx Supply Chain Services

FedEx Co. FedEx Freight FedEx Freight

FedEx Custom Critical

Caribbean Transportation Services

FedEx Kinko's FedEx Kinko's

• Established in 1973

• FedEx Co. Common stock is listed on the NYSE

• 17,901 shareholders as on 7/12, 2004

• 235,000 employees

• Distribution to 215 countries with 645 aircraft and 84,000 vehicles

• Total revenue in 2003 was over $24 billion

• Credit Rating “BBB”, outlook stable, S&P Ratings Services, 2004

• Founded in 1907• 355,000 employees,12/31, 2003• Class A common stock is not listed on any securities exchange• Class B common stock is listed on the NYSE• As of February 28, 2004, there were 169,751 and 14,409 record holders

of Class A and Class B stock, respectively• In 2003, an average of more than 13 million pieces per day throughout

the United States and in over 200 other countries and territories• The 9th largest airline in North America and 11th largest in the world• Total revenue in 2003 was over $33 billion• Credit rating AAA/Aaa from Standard and Poor's and Moody's, respecti

vely

Michael L. Eskew

Chairman and Chief Executive Officer

"At its core, synchronized commerce is about getting the right goods, to the right place, at the right time and in the right physical and financial condition. It’s not just a process. It’s an emerging industry space – a $3 trillion worldwide market. "

• Purdue University with a bachelor's degree and completed the Advanced Management Program at the Wharton School of Business.

• Began his UPS career in 1972 as an industrial engineering manager in Indiana.

• Eskew held this position on January 1, 2002.

a $3 trillion worldwide market…

Aircrafts

Description Owned Leased-------------------------------- -------------- --------------Boeing MD11 8 34Boeing MD10-30(2) 3 2Boeing DC10-30 2 15Boeing MD10-10(2) 27 - Boeing DC10-10 35 4Airbus A300-600 8 36Airbus A310-200/300 35 16Boeing B727-200 82 12Boeing B727-100 19 - ATR 72-202 2 - ATR 42-300/320 22 - Fokker F27-500 20 - Fokker F27-600 7 - Cessna 208B 246 - Cessna 208A 10 -

-------------- --------------Total 526 119

Description Owned Leased ------------------------------------------ ---------------- ----------------McDonnell-Douglas DC-8-71 23 - McDonnell-Douglas DC-8-73 26 - Boeing 727-100. 51 - Boeing 727-200. 2 - Boeing 747-100. 9 - Boeing 747-200. 4 3Boeing 757-200. 75 - Boeing 767-300. 32 - Boeing MD-11. 12 - Airbus A300-600. 32 - Other - 313

---------------- ----------------Total 266 316

---------------- ----------------

GEOGRAPHICAL INFORMATION

Revenues: 2003U.S. 18,643$ International 6,067

-24,710$

-Operating income 1,440Operating margin 5.80%Net income 838$

Revenues: unit:m1llion 1994U.S. 6,200 International 2,280 Operating Income 530

International Revenue/Total Revenue

27%/1994 25%/2003

GEOGRAPHICAL INFORMATION

Revenue: 2003U.S. domestic package 25,022$ International package 5,561Non-package 2,902Consolidated 33,485$ Operating Profit:U.S. domestic package 3,272$ International package 709Non-package 464Consolidated 4,445$ Operation margin 13.27%Net Income 2,898$

Revenues: unit:m1llion 1994U.S. 17,298 International 2,278 EBT 1,575

International Revenue/Total Revenue

12%/1994 17%/2003

FedEx UPS S&P 500

Cumulative return 2001.1 ~ 2004.9 (%) 115.49% 29.23% -15.58%

0%20%40%60%80%

100%120%140%

01/31

/2001

01/31

/2002

01/31

/2003

01/30

/2004

FedEx UPS

Risk & Return

Compare Stock Price

FedEx UPS

2.19% 1.15%

Jenson’s * -0.27% -2.09%

0.50 0.34

R2 0.12 0.13*Assumption Rf= 4.91% (30 year US G. bond rate of 2004 10.1)**Data:2001.10~2004.9

Risk & Return

Cost of Invested Capital, 2003

WACC


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1985 1987 1989 1991 1993 2003

FedEx UPS

mm 1994 2003

FedEX

Yield of senior BBB 8.91% 6.70%



UPSCost of debt(AAA) 7.80% 5.44%Cost of equity 13.11% 6.75%Cost of capital 12.08% 6.41%

Assumption :Equity Risk Premium: 5.4%Risk Premium BBB :1.79%Risk Premium AAA :0.53%

Market Value Added (1994~2003)

FedEx 1994 2004/5/31 changeAnalysis of market value added Book value of equity 1,925 8,036 6,111 I nterest bearing debt and equivalents 3,398 17,937 14,539 Capital (book value) 5,323 25,973 20,650 Market value of equity 3,193 22,074 18,881 I nterest bearing debt and equivalents 3,398 17,937 14,539 Capital (market value) 6,591 40,011 33,420 Market value added 1,268 14,038 12,770

UPS 2003/12/31 changeAnalysis of market value added Book value of equity 4,647 14,852 10,205 I nterest bearing debt and equivalents 1,996 4,993 2,997 Capital (book value) 6,643 19,845 13,202 Market value of equity 13,630 41,748 28,118 I nterest bearing debt and equivalents 1,996 4,993 2,997 Capital (market value) 15,626 46,741 31,115 Market value added 8,983 26,896 17,913

Appendix

• The Malcolm Baldrige National Quality Award signed by Ronald Reagan into law on August 20, 1987.

• To amend the Stevenson-Wydler Technology Act of 1980 with the objective of encouraging American business and other organizations to practice effective quality control in the provision of their goods and services.

• Foundation for the Malcolm Baldrige National Quality Award, established in 1988. The Award is named for Malcolm Baldrige, who served as Secretary of Commerce from 1981 until his tragic death in a rodeo accident in 1987. His managerial excellence contributed to long-term improvement in efficiency and effectiveness of government.

• In 1990, Cadillac, IBM Rochester, Wallace & FedEx received the honor

Malcolm Baldrige National Quality Award

Calculating Economic ProfitEconomic Value Added

Calculating EVA

Net Sales- Operating Expenses------------------------------

Operating Profit (EBIT)

- Taxes------------------------------ Net Operating Profit After

Tax (NOPAT)

- Capital Charges (Invested Capital x Cost of

Capital)------------------------------ Economic Value Added

(EVA)

Economic Value Added (EVA) is a financial performance method to calculate the true economic profit of a corporation. EVA can be calculated as net operating after taxes profit minus a charge for the opportunity cost of the capital invested. EVA is an estimate of the amount by which earnings exceed or fall short of the required minimum rate of return for shareholders or lenders at comparable risk. Unlike Market-based measures, such as MVA, EVA can be calculated at divisional (Strategic Business Unit) level.Unlike Stock measures, Economic Value Added is a flow and can be used for performance evaluation over time.Unlike accounting profit, such as EBIT, Net Income and EPS, EVA is Economic and is based on the idea that a business must cover both the operating costs AND the capital costs. Usage of the EVA method Economic Value Added (EVA) can be used for the following purposes:- setting organizational goals- performance measurement- determining bonuses- communication with shareholders and investors- motivation of managers- capital budgeting ( news on budgeting )- corporate valuation

Calculating MVA

Formula

Market Value Added (MVA) = market value - invested capital.

Market Value Added (MVA) is the difference between the equity market valuation of a listed/quoted company and the sum of the adjusted book value of debt and equity invested in the company. In other words it is the sum of all capital claims held against the company; the market value of debt and the market value of equity. The higher the Market Value Added (MVA), the better. A high MVA indicates the company has created substantial wealth for the shareholders. MVA is equivalent to the present value of all future expected EVAs. Negative MVA means that the value of the actions and investments of management is less than the value of the capital contributed to the company by the capital markets. This means that wealth or value has been destroyed. Note: the aim is to maximize MVA, NOT to maximize the value of the firm, since this can be easily accomplished by investing ever-increasing amounts of capitalNote: MVA does NOT take into account the opportunity costs of the invested capital.Note: MVA also does NOT take into account intermediate cash returns to shareholders.Note: Market Value Added (MVA) can not be calculated at divisional (Strategic Business Unit) level and can not be used for private held companies.

The End

the battle for value: fedex v.s. ups

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