FedEx Company History

• FedEx
– Business model conceived by Fred Smith (undergraduate term paper) – Invests $4 million of his own capital and raises an additional $91 million – Company launched in 1971 with FedEx Express

• Provides transportation, e-commerce and business services • Four business segments: Express, Ground, Freight & Services • By 2009*
– $35 billion in revenues – 6.9 million daily shipments – 694 Jets & 22,000 ground vehicles
*Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.

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UPS Company History

• UPS
– Company launched in 1907 as American Messenger Company, by Jim Casey (19 years old) – Company renamed United Parcel Service of America in 1929 – Logistics services including: transportation, distribution, ocean and air freight, brokerage and financing

• Three business segments: U.S. Domestic Package, International Package & Supply Chain, and Freight • By 2009*
– $45 billion in revenues – 15.8 million daily shipments – 268 Jets & 101,900 ground vehicles
*Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.

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Enterprise Value Calculation Flowchart

EBIT = Revenue – COGS – Selling & Admin Expense

NOWC = OCA - OCL

YTM of bond

CAPM

NOPAT = EBIT(1 – T)

ΔNOC = ΔNFA + ΔNOWC

Cost of Debt (rd)

Cost of Equity (rs)

FCF = NOPAT - ΔNOC

WACC = wdrd(1 – T) + wsrs

Enterprise Value = FCF1(1 + WACC) + FCF2(1 + WACC)2 + … + FCF5(1 + WACC)5
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Historical Free Cash Flow (FCF)

2008 FedEx UPS $(53M) $5,101M

2009 $(304M) $2,083M

2010 $619M $2,224M

2011 $(47M) $3,578M

2012 $(415M)

• 2009 Global Economic Recession
– Significant drop in business & stock value – Sales revenues down for both FedEx and UPS

• FedEx Express business segment hit the hardest • High fuel prices

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General Assumptions for FCF Analysis

General
• Global economic recovery timeline – Reduced earnings forecasts in 2012/13 – Trade volumes – High fuel prices • • Corporate tax increase Boost profits by increasing shipping rates

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FedEx Assumptions for Future FCF

FedEx
• • Strategic acquisitions in growing global markets (Mexico, Poland, France and Brazil) Cost Cutting Plan – Boost profits by $1.7 billion annually through shedding jobs, aircraft and underused assets – 3-year plan starting in 2012 • International Expansion – South Africa, Italy, Istanbul and Turkey

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FedEx Assumptions for FCF Analysis
2013 Sales COGS/Sales S&A/Sales Tax Rate CA/Sales CL/Sales 1.25% 50.00% 70.00% 37.50% 38.94% 23.00% 2014 1.75% 50.00% 70.00% 37.50% 38.27% 23.00% 2015 2.00% 50.00% 70.00% 38.50% 37.51% 23.00% 2016 2.50% 50.00% 70.00% 38.50% 36.60% 23.00% 2017 2.50% 50.00% 70.00% 38.50% 35.53% 23.00%

• • • •

Weighted average of sales growth in past years = 1.65%. Expect small drop followed by increase with economic recovery COGS + S&A based on previous average Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase Current Assets and Current Liabilities shown as percentage of total sales
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UPS Assumptions for FCF Analysis
UPS
• FY13 rate increase – 4.5% for UPS Air (4.9% for select destinations) – 4.9% for UPS Ground • Expand main European air hub in Cologne, Germany by 70% – 190,000 packages per hour – Targeted completion in 2013 • Planned Acquisition of TNT in 2012

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UPS Assumptions for FCF Analysis
2012 Sales COGS/Sales S&A/Sales Tax Rate CA/Sales CL/Sales 2.50% 50.00% 80.00% 35.70% 29.00% 11.00% 2013 3.00% 50.00% 80.00% 35.70% 29.00% 11.00% 2014 4.00% 50.00% 80.00% 36.70% 29.00% 11.00% 2015 4.50% 50.00% 80.00% 36.70% 29.00% 11.00% 2016 5.00% 50.00% 80.00% 36.70% 29.00% 11.00%

• • • •

Slow growth rate for 1st 2 years with subtle growth later COGS + S&A based on previous average in 2011 Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase Current Assets and Current Liabilities shown as percentage of total sales in 2011
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Projected FCFs

2012 FedEx UPS
* Actual FCF

2013
$1,068M $3,753M

2014
$1,048M $3,766M

2015
$1,005M $3,903M

2016
$1,013M $4,066M

2017
$1,039M

$(415M)* $3,415M

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Bond Yields (rd)

• FedEx
– 20-year bond, non-callable, non-transferable – Price $102.50, YTM 2.337% – Bond Rating BBB, low-medium grade

• FedEx rd used as approximation for UPS rd
– No qualifying bonds for UPS

• Cost of Debt
– rd = YTM = 2.337% – For WACC calculation….. rd = 2.337% * (1-.362) = 1.49%

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Cost of Equity (rs)
CAPM rRF RPM β Cost of Equity FedEx 4.69% 7.74% 1.2386 14.28% UPS 4.69% 7.74% 0.8432 11.22%

DCF D0 D1 P0 g Cost of Equity

FedEx $0.54 $0.58 $91.46 7.70% 8.34%

UPS $2.28 $2.42 $72.50 6.17% 9.51%

Bond Yield + Risk Premium Yield Risk Premium Cost of Equity 2.337% 5.00% 7.337%

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Weighted Average Cost of Capital (WACC)
WACC = wdrd(1 – T) + wsrs

FedEx Wd rd T Ws rs WACC 5.68% 2.34% 36.2% 94.32% 14.28% 13.55%

UPS 0.048% 2.34%* 35.7% 99.95% 11.22% 11.21%

*Cost of debt based in FedEx bond yield The Surviving 6 14

Enterprise Value & Stock Valuation
FedEx PV of Terminal Value PV of FCFs Enterprise Value Current Share Price Est. Intrinsic Share Value $4,050M $3,600M $7,650M $89.71 $12.49 UPS $21,318M $13,785M $35,103M $73.43 $52.99

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Questions?

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