UPS FedEx

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Industry Breakdown

• Air
• Ground
• Time-sensitive
• Time-deferred

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Industry Breakdown

• Air
• Domestic Air comprises 60 of market by revenue
• 46 of volume measured in of shipments

• Ground
• Ground comprises 40 of market by revenue
• 54 by volume measured in of shipments

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Industry Trends

• Convergence of the business model
• Globalization
• E-commerce
• Supply chain
• Logistics

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Major Players

• UPS
• FedEx
• United States Postal Service (USPS)
• Airborne Freight
• CNF Transportation Inc.
• DHL

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UPS Market Leader

• Efficient Operating system
• UPS has been more profitable over recent years
• It is much larger in size if we look at assets
• UPS has an AAA credit rating compared to FedEx
  with has a rating of BBB

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Operating system
UPS Brown
Customer
Sorting Center for Express and Ground
To destination
FedEx Express
Customer
Sorting Center for Express
To destination
FedEx Express
Sorting Center for Ground
To destination
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UPS FedEx

• 1997-1999
• ROE 25.2
• Av. Net Profit Margin 6.5
• 1998
• On-balance sheet assets 23 billion
• Total Packages per day 12,352

• 1997-1999
• ROE 10.6
• Av. Net Profit Margin 2.8
• 1998
• On-balance sheet assets 10.6 billion
• Total Packages per day 4,518

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Best of Breed ValuationBest of Breed (BoB) A
company with a substantial advantage over its
competitors in size, marketshare, and performance
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Market to Book

• Market to Book is Market Capitalization divided
  by Book Value of Equity
• Market to Book is a measure of how much investors
  are willing to pay for a companys present equity
  over the book price
• It gives us a sense of how much investors
  expectations about the true value and possible
  undervaluations contribute to the share price
• BoB companies typically have twice the Market to
  Book of their competitors

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Market to Book Valuesfor Firms in 1999

• Home Depot 12.7
• Lowes 5.8

• Wal-Mart 11.6
• Target 6.0

• Coca-Cola 15.6
• PepsiCo 7.9

Average Market to Book increase for BoB is 102
5.42
2.68 202 5.42

• UPS _____

• Fedex 2.68

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Market to BookUPS Share Price Valuation

• Book Value of Equity 7.2 Billion
• Market to Book 5.42
• Shares Outstanding 1,210,695,534
• 7.2 Billion 5.42
• 38.9 Billion Projected Market Capitalization
• 38.9 Billion / 1.2 Billion
• 32.16 Projected Share Price
• Suggests a price of about 32 per share for UPSs
  present market value

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ROE Return On Equity

• Standard Calculation
• Net Income / Shareholders Equity
• Du Pont Identity
• ROE (Profit Margin) x (Asset Turnover) x
  (Equity Multiple)
• Asset Turnover and Equity Multiple are roughly
  the same so the UPSs higher ROE is driven by
  higher profit margins
• Measures how well the equity performs
• A companys Market to Book value correlates
  positively with its ROE value
• The ROE for UPS over FedEx is significantly
  higher than other BoB companies over their
  competitors

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Market to BookComparable Industry ROE values

• Wal-Mart 25
• Target 22
• 14 Increase

• Home Depot 25
• Lowes 17
• 47 increase

• Coca-Cola 40
• PepsiCo 31
• 29 increase

Average ROE difference for BoB is 28

• UPS 25.2
• FedEx 10.6
• 137 difference

• 137 is a significant outlier to the other BoB
  companies in this respect, it is way ahead of
  FedEx

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ROE Effect on Market to Book

• UPS has an ROE significantly higher than FedEx
  and because ROE is highly correlated with Market
  to Book the 2 to 1 multiple is inaccurate
• Using a 3 to 1 multiple we get a Market to Book
  value of 8.04 for UPS

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Market to BookUPS Share Price Valuation

• Book Value of Equity 7,173 Million
• Market to Book 8.04
• Shares Outstanding 1,210,695,534
• 7,173 Million 8.04
• 57.7 Billion Projected Market Capitalization
• 57.7 Billion / 1.2 Billion
• 48.08 Projected Share Price
• Suggests a price of about 48 per share for UPSs
  present market value
• IPOs are generally undervalued by 11, more for
  small firms,
• less for large firms
• Discounting by 7 gives us an IPO price of 44.65

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P/E Benchmarking

• P/E is Price per Share divided by Earnings per
  Share
• It is easiest to think about this as how long it
  takes for the investment to pay itself off
• Higher P/E indicates growth expectations
• If we can infer what the P/E of a company will be
  once it goes public, then backing out a price is
  easy since we know the earnings

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Price to Earnings Valuesfor Firms in 1999

• Home Depot 50.9
• Lowes 34.1

• Wal-Mart 46.1
• Target 27.0

• Coca-Cola 39.3
• PepsiCo 25.5

Average Price to Earnings markup for BoB is 58
31.3
19.8 158 31.3

• UPS _____

• FedEx 19.8

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Benchmarking UPS on FedEx

• Implied P/E 19.8 x 158 31.3
• In 1999 UPS had Earnings per Share of 2.04
• Implied Market Value Price per Share
• 2.04 x 31.3 64
• Reduction in value for IPO of 7 gives us an IPO
  price of 59

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What really happened?

• In late October 1999 UPS gave an estimate of
  36-40 per share
• By early November this had risen to 47-49 per
  share
• On November 10th, 1999 UPS went public at 50 per
  share
• Raised 5.47 billion and was the largest IPO up
  to that point in U.S. history

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Undervalued by Investment Banks?

• UPS stock opened at 65 per share
• Stock continued to rise throughout the day until
  it closed at 67.25
• Stock opened 30 higher than IPO price and closed
  35 higher than IPO price
• Inaccurate pricing cost UPS 1.46 billion

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Overconfidence by investors?
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UPS vs. FedEx