KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

CORPORATE FINANCE
(FIN 4040)

CASE ANALYSIS:

“THE BATTLE FOR VALUE, 2004: FEDEX CORP. VS. UNITED

PARCEL SERVICE, INC.”

PREPARED BY:

1328350 ANIS SYAZIANIE BINTI CHE MOHD ZAIMI

1323568 SHARINA AZLEEN BINTI ERMAN EFENDI
1321976 AFIFAH NABILAH BINTI MOHD SAFEI
1329010 MUNIRAH BINTI RAMLI
1322836 RUZANA BINTI SUHAIMI

SECTION: 4

SESSION:
SEMESTER 1, 2016/2017

LECTURER:
DR. ROSLILY BINTI RAMLEE

SUBMISSION DATE:
19TH DECEMBER 2016
 CONTENTS

1.0 INTRODUCTION ...................................................................................................................... 3

2.0 QUESTIONS .............................................................................................................................. 4

2.1 QUESTION 1.......................................................................................................................... 4

2.2 QUESTION 2.......................................................................................................................... 5
2.3 QUESTION 3.......................................................................................................................... 5
2.4 QUESTION 4........................................................................................................................ 15
2.5 QUESTION 5........................................................................................................................ 17
3.0 CONCLUSION ............................................................................................................................. 18

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1.0 INTRODUCTION

In June 18, 2004, United States and China signed a landmark air-transportation
agreement that will increase by five times the number of the commercial cargo flights
between the two countries. This agreement also allows for the establishment of air-cargo hubs
in China and landing rights for commercial airlines at any available airport. This gives
opportunity to FedEx Corporation (FedEx) and United Parcel Service Inc. (UPS), the only
US all-cargo carriers to be permitted to serve the vast Chinese market. Thus, the stock price
for both companies rises steadily since the talks began with FedEx outperformed UPS by
almost five times faster.

FedEx Corporation was founded in 1971 and suffered severe losses in 1973. By 1976,
FedEx finally got their profit of $3.6 million on an average daily volume of 19,000 packages.
However, in 1981, even though FedEx generated more revenue than any other US air-
delivery company, the competition in the industry had started to rise. During 1990s, FedEx
proved itself as an operational leader and has received the prestigious Malcolm Baldrige
National Quality Award from the President of the United States. The success was credited to
the deregulation and operational strategy as well as FedEx’s philosophy of ‘People-Service-
Profit’. By the end of 2003, FedEx had nearly $15.4 billion in assets and net income of $830
million on revenues of about $22.5 billion. The company had about 50, 000 ground vehicles,
625 aircraft, 216,500 full-and part-time employees, and shipped more than 5.4 million
packages daily.

United Parcel Service (UPS) was founded in 1907 and was the largest package-
delivery company in the world. Known in the industry as Big Brown, UPS was an industry’s
low cost provider, had been investing heavily in information technology, aircraft, and
facilities to support service innovations, maintain quality and reduces cost. By 2003, UPS
offered package-delivery services throughout USA, and moved more than 13 million
packages and documents through network every day. At the year-end 2003, UPS reported
assets, revenues and profits of $28.9 billion, $33.4 billion and $2.9 billion.

Therefore, with the new agreement signed between United States and China, the
industry observers wondered how the titanic struggle between FedEx and UPS would
develop, particularly for the investors in both firms. The issues are which firm was doing
better and what had been the impact of the intense competition between those two firms.

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2.0 QUESTIONS

2.1 QUESTION 1

What happened to FedEx and UPS’S stock price in early 2004? Why did they rise? Why did
one outpace the other?

According to the case, FedEx and UPS’s stock price rise steadily since the landmark
air-transportation agreement between United States and China that increases the number of
commercial cargo flights between the two countries. The agreement also allowed the
establishment of air-cargo hubs in China and landing rights for commercial airlines at any
available airport. Since UPS and FedEx are the only US all-cargo carriers, they were
permitted to serve the large Chinese market which then makes them to be the primary
beneficiaries of the landmark agreement.

Even though both of the companies’ stock price increases, FedEx outpaced UPS at a
rate nearly five times faster. This is because FedEx has the largest foreign presence in China
where they have 11 weekly flights which were almost twice of the UPS at 6 weekly Boeing
747 flights to China. The company also serves 220 Chinese cities and flew directly to
Beijing, Shenzhen, and Shanghai compared to UPS where they only serve nearly 200 cities
with direct flights only to Beijing and Shanghai. FedEx’s volumes in China had grown by
more than 50% between 2003 and 2004.

Besides, FedEx had virtually invented the customer logistical management and it was
widely perceived as innovative, entrepreneurial and an operational leader. However, it is
different with UPS where historically, they have a reputation for being big, bureaucratic and
an industry follower but recently, UPS also became an innovator and a tenacious adversary
where the company undergone a major overhaul of its image and was repositioning itself as a
leading provider of logistics and supply-chain management services.

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2.2 QUESTION 2

Why didn’t UPS create overnight delivery? How did FedEx get away with successfully
entering this market?

Based on the case study, UPS chose not to compete directly in the overnight delivery
market until 1982. Overnight delivery meaning that the delivery will be taken place on the
following day of shipment. For instances, if UPS made shipment on Monday, then the goods
will arrive on Tuesday. Therefore, it is believed that UPS chose not to enter into the overnight
delivery market due to the enormous cost of building an air fleet. Moreover, by doing an
overnight delivery it will go against UPS strategy of being the industry low-cost provider.

On the other hand, FedEx was able to successfully enter into the overnight delivery
market due to the strategy and large investment of capital made by Smith’s at the initial
stage of the business. According to the Smith’s strategy, FedEx will purchase their own plane
to transport packages. This strategy gives FedEx a competitive advantage over its competitors
since the other company is using cargo space that is available on passenger airlines.
Furthermore, FedEx success is also due to its hub-and-spoke distribution pattern as it
allows FedEx to serve more location faster and at a cheaper cost than its competitors. FedEx
also continue to expand their air-delivery business by acquiring more trucks and aircraft,
expanding services and raising capital.

2.3 QUESTION 3

How have UPS and FedEx performed financially?

In order to measure the financial performances of UPS and FedEx, we have decided
to compare the financial ratios of both companies. Financial ratios are the relationships
determined from a firm’s financial information and used for comparison purposes. There are
five categories of financial ratios that we are going to identify in this case which are Activity
Analysis, Liquidity Analysis, Long-Term Solvency Analysis, Profitability Analysis and
Growth Analysis.

1. Activity Analysis

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Activity Analysis measures the efficiency of UPS and FedEx in utilizing their assets. In this
section, we decided to compare the total asset turnover of UPS and FedEx from 1992 to 2003.
Total asset turnover is measured by dividing the sales with total asset.

Table 3.1 shows the total asset turnover for UPS and FedEx.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 1.83 1.86 1.75 1.66 1.50 1.41 1.45 1.17 1.37 1.24 1.19 1.16

FedEx 1.38 1.35 1.42 1.46 1.53 1.51 1.64 1.58 1.58 1.47 1.49 1.46

Diagram 3.1 shows the trend in total asset turnover for UPS and FedEx

2. Liquidity Analysis

In Liquidity Analysis, we are going to analyse the companies’ ability to pay their debts over
the short run without undue stress. In this section, we are going to focus on current ratio and
defensive interval.

a) Current Ratio

Current ratio is calculated by dividing the current assets with current liabilities. To a short-
term creditor, the higher the current ratio, the better. Meanwhile, to the firm, a high current
ratio indicates liquidity, but, it also may indicate an inefficient use of cash and other short-
term assets.

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Table 3.2 shows the current ratio for UPS and FedEx from 1992 to 2003.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 1.03 1.00 1.04 1.09 1.35 1.32 1.46 2.65 1.58 1.64 1.57 1.79

FedEx 0.87 0.99 1.15 1.05 1.07 1.09 1.03 1.13 1.14 1.06 1.25 1.18

Diagram 3.2 shows the trend in current ratio for UPS and FedEx.

b) Defensive Interval

A defensive interval measure can be used to measure how long a company can
operate until it needs another round of financing if the company is facing a strike and cash
inflows began to dry up. It is measured by dividing the current assets with average daily
operating costs.

Table 3.2.1 shows the defensive interval for UPS and FedEx from 1992 to 2003.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 1.71 1.83 1.47 1.36 1.38 1.60 3.12 5.13 3.07 2.82 4.98 4.57

FedEx 0.70 0.78 0.91 0.92 0.68 0.72 0.80 0.92 0.94 0.87 0.92 1.02

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 Diagram 3.2.1 shows the trend in defensive interval for UPS and FedEx.

3. Long-Term Solvency Analysis

Long-term solvency ratios measure the companies’ long-term ability to meet its
obligations. In this analysis, we are going to compare two commonly used measures in long-
term solvency analysis which are the debt-equity ratio and times interest earned.

a) Debt-Equity Ratio

The debt-equity ratio measures a company's financial leverage. It is calculated by

dividing a company's total liabilities by its stockholders' equity. This ratio determines how
much debt a company is using to finance its assets relative to the amount of value represented
in shareholders' equity.

Table 3.3 shows the debt-equity ratio for UPS and FedEx from 1992 to 2003.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 0.23 0.22 0.24 0.34 0.44 0.43 0.36 0.19 0.37 0.50 0.37 0.26

FedEx 1.24 1.21 0.95 0.70 0.52 0.51 0.41 0.29 0.37 0.36 0.28 0.28

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 Diagram 3.3 shows the trend in debt-equity ratio for UPS and FedEx.

b) Times Interest Earned (TIE) ratio

TIE ratio is measured by diving the Earnings Before Interest and Taxes (EBIT) with
the interest. This ratio measures how well a company has its interest obligations covered, and
it is often called the interest coverage ratio.

Table 4.3.1 shows the TIE ratio for UPS and FedEx from 1992 to 2003.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 18.68 23.59 20.85 17.19 13.71 7.38 12.17 16.08 19.58 16.83 23.15 36.41

FedEx 1.36 1.82 2.92 3.73 4.31 5.06 6.42 7.78 7.83 6.58 6.98 10.51

Diagram 4.3.1 shows the trend in TIE ratio for UPS and FedEx.

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4. Profitability Analysis

Profitability Analysis is intended to measure how efficiently the companies use their assets
and manages their operations.

a) Profit Margin

Profit margin is calculated by dividing the net income with sales. It indicates how many
percent does a firm earns profit for every dollar in sales. For every companies, high profit
margin is always desirable, other things remain constant.

Table 3.4 shows the profit margin (%) for UPS and FedEx from 1992 to 2003.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 3.12 4.55 4.82 4.96 5.12 4.05 7.02 3.26 9.86 7.83 10.18 8.85

FedEx -1.51 0.69 2.41 3.17 3.00 3.14 3.17 3.76 3.77 2.98 3.45 3.69

Diagram 3.4 shows the trend in profit margin for UPS and FedEx.

b) Return on Assets (ROA)

ROA measures how much profit a firm generates for every dollar of assets. It is measured by
dividing the net income with total assets.

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 Table 3.3.1 shows the ROA (%) of UPS and FedEx from 1992 to 2003.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 6.47 9.10 9.10 9.24 8.65 7.16 11.69 4.91 14.61 10.68 12.73 10.44

FedEx 1.63 4.38 6.45 7.08 6.75 6.51 6.94 7.33 7.32 5.74 6.38 6.30

Diagram 3.3.1 shows the trend in ROA of UPS and FedEx.

c) Return on Total Equity (ROE)

ROE measures how much the shareholders will be fared during the year. It indicates how
many percent the shareholders will earn for every dollar in equity. ROE is calculated by
dividing the net income with average total equity.

Table 3.3.2 shows the ROE (%) of UPS and FedEx from 1992 to 2003.

‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 13.87 20.53 20.30 20.25 19.42 14.93 24.27 7.08 30.14 23.14 25.55 19.51

FedEx -7.20 3.22 10.62 13.25 11.95 12.19 12.70 13.54 14.38 9.90 10.85 11.39

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 Diagram 3.3.2 shows the trend in ROE for UPS and FedEx.

5. Growth Analysis

Growth Analysis tells us how fast the company is growing. There are two measures
that we are going to use to measure the growth rate of UPS and FedEx which are sales and
net income.

a) Sales

Sales is the term used for operating revenues and it is normally stated in terms of a
percentage growth from the previous year. It is important for companies to have high sales
growth rate as possible.

Table 3.5 shows the sales growth (%) in UPS and FedEx from 1992 to 2003.

’92- ’93- ’94- ’95- ’96- ’97- ’98- ’99- ’00- ’01- ’02-
‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

UPS 7.65 10.08 7.51 6.29 0.40 10.37 9.13 10.05 2.94 2.04 7.08

FedEx 3.42 8.60 10.76 9.39 12.13 37.79 5.67 8.84 7.52 4.98 9.12

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 Diagram 3.5 shows the trend in the sales growth in UPS and FedEx.

b) Net Income

The growth in net income is more important than in sales because net income tells the
investor how much money is left over after all the operating costs are subtracted from sales.

Table 3.5.1 shows the net income growth (%) in UPS and FedEx from 1992 to 2003.

’92-‘93 ’93-‘94 ’94-‘95 ’95-‘96 ’96-‘97 ’97-‘98 ’98-‘99 ’99-‘00 ’00-‘01 ’01-‘02 ’02-‘03

UPS 56.86 18.51 10.57 9.88 -20.68 91.53 -49.28 232.28 -18.23 32.64 -8.93

FedEx -147.34 279.4 45.61 3.42 17.37 39.26 25.51 9.03 -15.1 21.50 16.9

Diagram 3.5.1 shows the trend in the net income growth in UPS and FedEx.

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The analysis of the financial performances in UPS and FedEx from 1992 to 2003 can be
summarized as follows:

Financial Analysis UPS FedEx

1. Activity UPS shows weakening FedEx shows a gradually

(Total asset turnover) performance since 1992. better performance in
asset management.

2. Liquidity UPS shows better FedEx shows weaker

(Current ratio and performance in liquidity as performance in liquidity
defensive interval) shown by higher rates in than UPS.
both current ratio and
defensive interval than
FedEx.

3. Long-Term Solvency UPS shows better FedEx declines rapidly in

(Debt-equity ratio and performance in solvency debt-equity ratio and
TIE ratio) through the gradual gradually increasing in TIE
improvement in the debt- ratio, but, still it shows low
equity ratio and higher rates performance than UPS.
in TIE ratio than FedEx.

4. Profitability UPS consistently beats FedEx shows gradually

(Profit margin, ROA FedEx in profit margin, positive improvements,
and ROE) ROA and ROE by showing but, still lower than UPS.
relatively higher percentage
than FedEx from 1992 to
2003.

5. Growth UPS shows improvements in FedEx shows better

(Sales growth and net growth, but, still below performance in sales and
income growth) FedEx. net income growth.

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2.4 QUESTION 4

What does the stock-price performance tell you?

The price to earnings (P/E) ratio is possibly the most studied of all the ratios. A stock
can go up in value without significant earnings increases, but the P/E ratio is what decides if
it can stay up. Without earnings to back up the price, a stock will eventually fall back down.
The reason for this is simple, a P/E ratio can be simplify as how long a stock will take to pay
back your investment if there is no change in the business.

The reason stocks tend to have high P/E ratios is that investors try to predict which
stocks will enjoy gradually larger earnings. An investor may buy a stock with a high P/E ratio
if he or she thinks it will double its earnings every year (shortening the payoff period
significantly). If this fails to happen, then the stock will fall back down to a more reasonable
P/E ratio. If the stock does manage to double earnings, then it will likely continue to trade at a
high P/E ratio.

The stock price performance to analyze FedEx and UPS using P/E ratio. Earnings-
per-share (EPS) is the most widely used ratio and communicates how much profit is
generated on a per-share basis while Price-Earnings (P/E) ratio conveys the market’s value of
a firm’s share relative to the earnings actually generated.

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 EPS should be interpreted over time, and both FedEx and UPS have steadily
increasing EPS since 1992. Share price for both firms has risen steadily with UPS overtaking
FedEx following the IPO in 1999 as shown in the graph below. In comparing FedEx and
UPS’ P/E ratios, UPS has been slightly higher than FedEx since its IPO in 1999 as shown in
graph above. This is because UPS initiated a two-for-one stock split, every shareholder with
one stock is given an additional share whereby the company exchange each existing UPS
share for two Class A shares. The company then sold 109.4 million newly created Class B on
the New York Stock Exchange in an initial public offering (IPO) that raised $5.266 billion,
net of issuance cost. This increasing of stock price is due high demand among investor and it
drives up the price. Another reason is that stock split gives a signal to the market that the
company’s share price has been increasing and people assume this growth will continue in
the future, and again, lift demand and prices.

Another measure that can be used is the cumulative compound annual return (CCAR),
which shows the percentage gain from holding each company’s share. At year-end 2003, the
cumulative annual return for UPS and FedEx was 705.95% and 528.02%, respectively,
indicating that the return from holding UPS’s stock was nearly 200% more than FedEx’s for
the same period. While both firms exceed the S&P 500 index in this measure, UPS again
outperforms FedEx.

In general, the advantage of the aforementioned measures is that they are linked to the
market price of shares, which is relevant. Also, since a company with higher and more certain
earnings forecasts will have a higher P/E ratio, this measure is risk-adjusted (Libby, et al.,

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2008). EPS is a fairly objective measure, as the ratio uses financial statement figures that can
be compared over time. The main disadvantages are that GAAP decisions influence the
earnings figure that drive these measures and that P/E ratios can be interpreted in various
ways, leading to inconsistencies.

2.5 QUESTION 5

If you had to vote for one of these two firms to enter the pantheon of excellent companies,
which one would you choose?

From the analysis, the best company to be chosen is UPS based on the ability of
historical performance in financial measurement. The UPS performs better providing
liquidity for managing cost and had strong potentials in generating profits to the companies.

To compare with the FedEx, UPS also enter the international market by following the
FedEx action to expand the industry, but the UPS’s growth was at the behind than FedEx
since they tried to maintain EVA to keep survive in the industry. FedEx was quite faster in
competing in global because they have non-financial advantage when enter China’s market
earlier and have market domination. Thus, FedEx’s share price had rocketed at a rate nearly
five times faster than UPS. The cost of transaction is quite cheaper since FedEx have invested
to the high technology and purchased own plane at the beginning of operation. However, the
FedEx had a problem in entering Europe and was forced to withdraw from the Europe. The
problems cause FedEx suffers more in financial.

Figure 5: EVA analysis for FedEx and UPS

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 Though, the UPS enter China a bit late, they still catch up FedEx growth by starting
from lower revenue in the beginning. UPS maintained gaining positive Economics Value
Added (EVA) and reached peak in 2003 at $1,195 million. Indeed, UPS grew three times
better from the last year. It means that, the additional return on the economic capital after
deducting from the cost capital. By the other words, the company is independent in gaining
profit return.

We believe based on the previous performance of the UPS, it can go further in making
profit based on the long term advantage and strong financial status. Therefore, it will attract
shareholders and increase investor’s confident in providing external financing for this
industry. Therefore, it is encouraged for the UPS to do more research development in the
quality services of their product, so that they can compete in large industry in China. China
can be the best platform for the UPS because it offers good logistic and infrastructure as well
huge of population there.

3.0 CONCLUSION

In June 2004, the Chinese air transportation market has become accessible to FedEx and
UPS, and a decision must be made about which company to invest in. Financial performance
measures discussed reveal that UPS is superior, while the most important non-financial
measure of international growth potential is in favor of FedEx. In the past, FedEx has entered
new markets first and UPS has followed. When FedEx entered Europe, it was forced to
withdraw and suffered massive losses. UPS’ approach in international markets has resulted in
lower growth than FedEx, but highly positive EVA and MVA. While the share price response
was due to FedEx’s ability to dominate the Chinese market first, we believe that in the long
run, UPS will be successful at creating value, while FedEx will likely encounter the same
challenges that it faced in Europe. For these reasons, the recommendation is to invest in UPS
in order to create maximum shareholder value that is sustainable.

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