TRANSPORTATION INDUSTRY

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TRANSPORTATION INDUSTRY

• Security Analysis

Student Managed Investment Portfolio ClassProf.
P.V. ViswanathSpring 2002
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ANALYSTS

• ELLEN MATUSHANSKY
• KENLEE ABRAHAM
• WAYNE LEE
• ERNEST R. LARENAS

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CRITERIA FOR STOCK SELECTION

• Transportation industry-wide selection
• Create a unique list from SP 1500 Super
  Composite, Yahoo Finance, and Multex.
• Financial Information obtained from StockVal,
  Bloomberg and Multex.
• Select stocks with positive Cash Flow.
• Select companies with a market value greater than
  1 billion market cap.

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CRITERIA FOR COMPANY SELECTION

• Each stock was ranked using the following ratios
• FCF/MVA
• DEBT/EQUITY
• CFFO/PRICE
• FCF/SALES
• FCF/CAPEX
• Ratio Normalization includes FCF/MVA,
  Debt/Equity, and Residuals (CapEx) weighted
  evenly to select stocks based on ratio levels in
  different sectors

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CRITERIA FOR COMPANY SELECTION

• Multiply rankings to find the product of the
  following
• FCF/MVA
• DEBT/EQUITY
• RESIDUALS
• Note assigning a weight to each ranking product
  did not change the outcome of the final 9 stocks
  selection
• The final four stocks were selected based on the
  analysts knowledge and growth potential of the
  each corporation.

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FINAL CUT

• United Parcel Services (UPS) - Trucking
• C.H. Robinson Worldwide (CHRW) - Misc.
  Transportation (Logistics)
• Atlantic Coast Airlines Holdings (ACAI) - Airline
• Expeditors International of WA (EXPD) - Misc.
  Transportation (Logistics)

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TRANSPORTATION SECTOR

• Overview

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Near Term Concerns

• Domestic and international economies weakness,
  jet fuel and diesel prices, rational industry
  wide pricing, increased insurance cost and safety
  concerns benefit some firms and leave others
  exposed
• The outlook for the air freight sector continues
  to remain weak with no signs of near term
  recovery.

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Air Freight

• Non asset base carriers tend to use commercial
  airlines over competing integrated carriers, US
  Bancorp believe it is important to consider the
  industry volumes excluding the integrated
  carriers. Therefore, to get a good picture of
  the heavy air freight environment, the package
  volumes for FEDEX and UPS should be excluded.
  When this is done, air freight volume for 2002
  declines 25.6/ y/y.

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Economic Recovery

• US Bancorp believes that if the economy does
  improve in the 2H02 to expect to see a modest
  improvement in air freight volumes. This
  improvement may be held back somewhat by a slow
  recovery in high tech products. Also, shippers
  will be hesitant to use air freight in a modestly
  improving economy as they will continue to be
  focused on cost savings and will look for low
  cost modes of transportation.

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TOP SELECTION

• We are recommending UPS as a Long Term Buy based
  on the following information

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United Parcel Services (UPS)

• United Parcel Service Inc. (UPS) is an express
  carrier, package delivery company and a global
  provider of specialized transportation and
  logistics services.
• Company's primary business is the time-definite
  delivery of packages and documents throughout the
  United States and in over 200 other countries.

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Management

• 12 member management committee
• Corporate culture that stresses teamwork over
  individuality
• CEO Michael Eskew, An industrial engineer by
  training
• Firms top strategist.
• Daily Ops Thomas Weidemeyer, a lawyer honed
  operational skills by launching UPS Latin
  America.
• Also built UPSs global air network and still
  serves as its president.
• Senior VP Joseph Pyne, started as Parcel sorter
  (1969), main architect of UPS worldwide marketing
  strategy (1990s)
• Currently oversees non-package units, UPS
  Logistics Group and UPS capital.

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Operations

• Started Ops in 1907 (foot Bicycle)
• Today unified air and ground network delivers 14M
  daily to 200 countries.
• Precision oriented Firm (pinky key)
• Domestic delivery Cash Cow produce 80 UPSs
  rev.
• Op margins fell during recession to 15
• Intl Ops 14 UPSs rev.
• Op margins have fallen sharply to barely 2.
• Profitable in Europe and expanding throughout
  Asia.

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Change on the Margin

• Most flexible Domestic op margin in industry.
• 1/3 of 370K workers part-timers.
• Union contract clause slowoption send home
• Technology innovations helps to improve margins.
  UPS employs 4K tech workers and invest 1B
  yearly on InfoTech (almost as much Aircraft).
• VC division holds stake in 12 Firms developing
  potentially lucrative technologies.
• E.g. Rf package labels (easier tracking than
  bar codes)

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Strategic Initiatives

• Parcel delivery service (60B)
• Logistics market (75B, 130B in 5yrs)
• UPS Logistics rev (3) 1.4B (3B-4B 5yrs)
• Grow biz thru acquisitions (20 since IPO)

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Growth Vehicles

• Fritz Companies(2001, CA) premier intl freight
  Forwarder (expertise customs clearance)
• UPS Logistics more valuable to customers.
• Deliveries, stocking inventories, filling orders,
  transporting goods.
• Microsoft of Parcel deliveries?

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Financial Services

• UPS financial Services in early stages.
• AAA credit rating and FCF 2B this yr.
• Loans Safety Net loans collateralized by A/R or
  Inventories.
• First Intl Bancorp (2001, CT) extends loans
  backed by SBA Export-Import Bank.

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Competition HOME DELIVERY

• U.S. Postal Service lower price, lower quality
• FedEx invented overnight air delivery. UPS
  seized nearly 1/3 air biz. FedEx seized only
  1/10th home-delivery biz (hasnt posted profit
  yet on it).
• UPS higher profit margins. Better at costs
  control and managing revenue mix.

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Intl Delivery Markets Global Logistics Market

• INTL
• DHL Worldwide Express dominant player.
• LOGISTICS MARKET
• FedEx (not interested?)
• Deutsche Post (DHL partner) pushing into U.S.
• Exel (Britains)
• TNT Post Group (Netherlands)

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Social Responsibility

• UPS domestic trucks uses compressed Natural Gas.
• Canada Mexico trucks fueled by Propane.
• UPS foundation donated 40M last year.

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Upside

• Economy recovery boosts UPSs bottom line.
• Logistics Firms Counter cyclical?
• Smoother revs thru diversification.

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Downside

• Biggest risk is prolonged recession.
• Union Contract expires July 2002.
• Intl Brotherhood Teamsters 15 day strike (1997)
• Contracts renegotiated every 5 yrs

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UPS StockPrice Volume

• Recent Price 60
• 52 Week High 61.55
• 52 Week Low 46.15
• Avg Daily Vol (Mil)1.57
• Beta 0.66

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2-stage FCFE Discount Model Analysis on UPS
Inputs

• Current EPS 2.2
• Current Dividend/share 0.76
• Current Capex/share 1.9
• Current Deprec/share 1.0
• Current Revenue/share 27.0
• Forward Beta 0.89
• ROC 21.3
• D/E 30.6

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2-stage FCFE Discount Model Analysis on UPS
Outputs

• Cost of Equity 8.9
• Current EPS 2.2
• EPS Growth rate (rapid phase) 16.7
• Working Capital as of Revenue 15.6
• Fair Value of Stock 91.5 (currently at 60.8)
• same growth rate in capex, deprec revenues

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Fair Valuation

• Recent price 60.
• 25X 2002 estimate of 2.24
• Analysts Expects 15 in 2003.
• UPS trading premium to FedEx SP.
• UPS higher ROE, profits, and FCF.
• FCFE model 70/share
• Change on margin
• Higher margin logistics financing contributes
  more to future rev.
• Hold 3-5 yrs easily outperform market.

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Conclusion

• Change of margin
• Multiple Growth areas
• Stability
• Infrastructure in place UPS Airlines (9th
  largest U.S./11th Worldwide)

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Other firms Considered

• We also looked at these firms, but after a
  thorough analysis decided it wasnt in our best
  interest to recommend.

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C.H. Robinson Worldwide (CHRW)

• C.H. Robinson Worldwide, Inc. is global provider
  of  multi-modal transportation services and
  logistics solutions  through a network of 139
  offices in 40 states and  internationally.

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CHRW Management

• Verdoorn, D.R. Chairman of the Board. Expected
  to Retire in 2002.
• Wiehoff, John P. President, Chief Executive
  Officer. Expected to replace Mr. Verdoorn.
• Butzow Barry W. Senior Vice President, Office of
  the President and Director.

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CHRW StockPrice Volume

• Recent Price 34.45
• 52 Week High 35.15
• 52 Week Low 24.05
• Avg Daily Vol (Mil) 0.33
• Beta 0.29

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Expeditors International of WA (EXPD)

• EXPD is engaged in the business of global
  logistics  management, including international
  freight forwarding and  consolidation, for both
  air and ocean freight.

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EXPD - Management

• Peter Rose, Chairman/CEO
• Glen M. Arger, President
• R. Jordan Gates, Sr. VP/CFO/Treas.
• David Lincoln, Sr. VP/CIO
• Jeffrey King, Sr. VP/Counsel/Secy.
• Charles Lynch, VP/Contr.

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EXPD StockPrice Volume

• Recent Price 58.57
• 52 Week High 65.92
• 52 Week Low 41.95
• Avg Daily Vol (Mil) 0.34
• Beta 1.43

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Atlantic Coast Airlines Holdings, Inc. (ACAI)

• Atlantic Coast Airlines Holdings, Inc. is the 
  holding company of Atlantic Coast Airlines, a
  regional  airline serving 53 destinations in 24
  states in the Eastern  and Midwestern United
  States.

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ACAI - Management

• K. Skeen, Chairman/CEO
• T. Moore, President/COO
• R. Surratt, CFO/Exec. VP/Treas.
• R. Kennedy, VP/Counsel/Secy.

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ACAI StockPrice Volume

• Recent Price 24.05
• 52 Week High 30.23
• 52 Week Low 8.04
• Avg Daily Vol (Mil) 0.50
• Beta 1.39