University of Waterloo
The Battle for Value, 2004:
FedEx Corp. vs. United Parcel Service, Inc.
Hereafter referred to as “FedEx” and “UPS”
AFM 471 – Cases in Corporate Finance
Team 10: Akua Acheampong, Jody Grewal, Kieng Iv, Rhea Rasquinha
October 14th 2010
To: Current and Prospective Investors
From: JARK Inc. Fund Managers
re: Battle for Value, FedEx Corp. vs. United Parcel Service, Inc.
The purpose of this memo is provide a recommendation on whether to invest in FedEx or UPS, given
that the air transportation market in China is now open to both companies. Outlined in this memo are an
assessment of the strategic approaches and an evaluation of the financial and non-financial performance
of both companies, which led to the conclusion that UPS is the superior investment opportunity.
1.0 Strategic Approaches for FedEx and UPS
FedEx and UPS are package-delivery companies that together provide supply chain, transportation,
logistics and related information services. FedEx has expanded from operating in 25 U.S. cities, to
serving international markets. Similarly, UPS initially operated just within the U.S. before expanding
into Canada, Europe, Latin America and most recently, China. FedEx and UPS target the same markets
and compete for presence in them.
FedEx and UPS have some key differences with regards to their strategic approach to business (see
Table 1). FedEx, which is regarded as an innovative, entrepreneurial, and operational leader has a
strategy that focuses on providing high quality services to its customers. FedEx’s technological
innovations, including the COSMOS interface, enables it to provide timely delivery service to its
customers and large clients.
UPS has a strategy that is driven by its quest for efficiency and cost reduction. In the past, UPS was
regarded as “financially and operationally conservative” due to its reserved approach to investing in
information technology. It was considered an industry follower, as it did not come up with unique
processes to distinguish itself from its competitors. Since its IPO in 1999, UPS has made efforts to
change its image through aggressive information technology investments and acquisitions.
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FedEx and UPS have goals of being in a strong financial position and providing high returns to
shareowners. This is why both companies have been finding ways to cut costs through economies of
scale and use of information technology. The strong rivalry between FedEx and UPS has led to
matching each other in terms of capital investment expenditures and services they offer. Both
companies have branched out to provide logistics services to large corporate clients and are also
interested in expanding into the Chinese market, where there is high potential for growth.
2.0 Performance Measures
2.1 Financial Measures
2.1.1 Financial Statement Information
Financial performance measures that can be obtained from a firm’s financial statements consist of
absolute data and financial ratios. Absolute measures such as income, net assets and equity, reveal
trends and allow a company to be compared to its performance over time, while financial ratios,
including return-on-assets and current ratio, adjust for scale and allow for comparisons of differentsized companies (Libby, et al., 2008).
Financial ratios are ideal to compare FedEx and UPS, since UPS has $13.5 billion more in assets and
$11 billion more in revenues than FedEx. Please see Table 2 for a comparison of the most common and
widely used financial ratios. UPS is outperforming FedEx in liquidity, solvency and profitability
measures, while lagging in activity and growth. This would indicate that UPS has superior financial
performance, but the disadvantage of using financial statement information is the use of book values,
not market values, which are historic. As a result, the information is not as relevant, and inferences are
backward, not forward-looking. Another weakness is that the measures are driven by information
influenced by GAAP decisions and estimates, which might incorporate management bias and error
(Scott, 2009).
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2.1.2 Share Price Information
More relevant measures, such as those obtained from the stock price performance, can be used to
analyze FedEx and UPS. 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 (Scott, 2009).
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 (see Appendix 2). In comparing FedEx and UPS’ P/E ratios, UPS has been slightly higher than
FedEx since its IPO in 1999 (see Appendix 1). 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., 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.
2.1.3 Economic Value Added and Market Value Added
Economic Value Added (EVA) and Market Value Added (MVA) should be analyzed as they are tied
to market value, they allow for comparisons amongst investments, and EVA is risk-adjusted. EVA is
the excess of Net Operating Profits After Taxes (NOPAT) over the cost of capital or the spread
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between the Return on Net Assets (RONA) and the WACC. If the return from the firm’s capital
investments is greater than the cost of that capital, RONA will be exceeding the minimum return
required by investors and value will be created. MVA is the present value of all future EVA, meaning
that if RONA is expected to exceed WACC into the future, MVA will be positive.
Appendix 3 shows how the cumulative EVA for UPS has been increasingly positive since 1998, while
Appendix 4 shows a very large negative cumulative EVA for FedEx. While both companies’ MVAs
are positive, UPS’ has increased at a much higher rate and is nearly 6 times higher than FedEx.
When share price is graphed alongside EVA for UPS, the two measures appear to be correlated, but
this is not the case for FedEx. Although FedEx has a large negative EVA, the share price has continued
to rise (see Appendix 4) and MVA is also positive. Stock price and MVA are not mirroring historic
EVA and this could be due in part to EVA being driven by figures which are backward-looking and
which include subjective GAAP estimates and adjustments.
2.1.4 Relevant Financial Measures
While financial statement, stock performance and value-added measures have their strengths and
weaknesses, the financial measures which are most relevant for analyzing the performance of FedEx
and UPS are Net-Profit-Margin (NPM), CCAR and WACC. NPM measures the ability to generate
revenues and control costs, which is important given the magnitude of these two companies. CCAR
measures the return on stock held over time, which is critical given both companies’ long-term
commitment to shareowners. A lower WACC reveals lower risk-perception and better ability to
generate economic profits.
The relevant financial measures indicate that UPS is superior to EPS. However, when evaluating the
performance of FedEx and UPS, non-financial measures must also be analyzed.
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2.2 Non-Financial Measures
2.2.1 International Growth Potential
The most critical non-financial measure is the international growth opportunities for FedEx and UPS.
With the landmark air-transportation agreement allowing for more foreign presence, the company that
can expand globally will control the developing markets. This will determine who will take a larger
share of the market, resulting in superior shareholder value.
FedEx’s cost structure is mostly fixed, providing ample opportunity and resources to take advantage of
the Chinese market at a low incremental cost. FedEx has the largest Chinese presence in the industry,
and its volume to China grew by more than 50% in a year. Although UPS has experienced significant
international growth, revenues from these markets are far below one-third of total revenue. UPS
reported 60% growth in traffic on its principal U.S.-Shanghai route since 2001, but has lagged in
penetration into the Chinese market as it only has about one half of the flights of FedEx.
Given that FedEx’s share price increased 5 times faster than UPS’ following the air-transportation
agreement reached in June 2004, investors believe that future opportunities in international business
will drive long-term growth for FedEx over and above that of UPS.
2.2.2 Other Non-Financial Measures: Capital Investment and Product/Market Focus
These two industry competitors are racing to out-innovate one another and because of this, large
budgets have been allocated to capital expenditures. The amount and type of capital investments
indirectly impacts financial measures, as they facilitate customer-focused services which contribute to
revenue growth. FedEx’s COSMOS and UPS’ DIAD systems were created to ensure high levels of
current and future customer service, and caused capital expenditures to rise at a rate of 34.64% and
36.78% for FedEx and UPS, respectively. As such, it appears that both companies are investing
appropriately and at a comparable level for this measure.
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The choice in products and markets is another important non-financial measure that directly impacts
financial performance. FedEx owns the express delivery industry and does the majority of its business
in the air-express segment. While FedEx attempted to expand its operations within Europe, it is
estimated that it lost a billion dollars due to challenges. FedEx has also expanded into Asia with FedEx
AsiaOne. Despite this focus on international development, FedEx’s domestic market has generated the
majority of its revenue and growth since 1992. It is evident that FedEx’s product/market choice has
affected its financial performance, as its operations in Europe resulted in low operating profits and low
EVA and MVA. UPS competed in mainly the business delivery market where it owned the majority of
the large clients; however, UPS has expanded its operations to tailor to consumers. Though UPS is the
dominant player in the United States in terms of revenue and identifiable assets, its growth in revenue is
attributable to its international presence. Through its high efficiency in delivering goods and its growth
in international markets, UPS has been able to achieve highly positive EVA and MVA. UPS is the
superior performer in the product-market focus measure.
3.0 Recommendation
At 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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Appendix
Table 1
Strategic Component
FedEx Corporation
UPS
Mission
Focuses on producing “superior
financial returns for
shareowners by providing high
value-added supply chain…”
Labour force
FedEx has a “People, Service,
Profit” philosophy that
emphasizes employee
participation. This allows for a
non-unionized labour force that
works to achieve the goals of
the company.
Focuses on “sustaining a
financially strong company,
with broad employee
ownership, that provides a
long-term competitive return
to …shareowners”
UPS has a system that does
not allow for flexibility in
employee schedules. This is
often resisted by the
company’s heavily unionized
workforce.
Information
Technology
FedEx invests in information
technology as a way of
improving quality delivery
service to clients and customers.
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UPS invests in information
technology as a means of
improving efficiency in its
delivery service to client and
customers.
Table 2
Financial Statement Ratios
FedEx
Activity (e.g. fixed asset turnover) Relatively consistent from
Ability to use assets to generate gross 1992-2003; Better than UPS
revenues
UPS
Weakening performance
since 1992
Liquidity (e.g. current ratio)
Ability to pay short-term debt
obligations
Current, Cash and Defensive All ratios are improving;
interval ratios have improved; Better than FedEx
cash from operations ratio is
volatile
Solvency (e.g. debt-to-assets)
Ability to pay off all financial
obligations if all assets were sold
Improving
Better than FedEx
(especially coverage ratios)
Profitability (e.g. return-on-equity) Improvement since 2001
Ability for assets and equity to
generate income over expenses
Growth
Better than UPS
Source: Exhibits 2 and 3
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Consistently better than
FedEx
Improving
Appendix 1
P/E Ratio
100
80
60
UPS
40
FedEx
20
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Source: Exhibit 8
Appendix 2
Share Price
80
70
60
50
40
30
20
10
0
UPS
FedEx
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Source: Exhibit 8
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Appendix 3
UPS: Cumulative Economic Value and Stock Price
80
70
4,000
60
3,000
50
2,000
40
30
1,000
Share Price
Cumulative EVA ($millions
USD)
5,000
Cum EVA
Share Price
20
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
(1,000)
10
0
Year
Source: Exhibit 8 and 10
Appendix 4
FedEx: Cumulative Economic Value and Stock Price
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-
70
Cumulative EVA
($millions USD)
50
(1,000)
40
(1,500)
30
(2,000)
20
(2,500)
10
(3,000)
0
Year
Source: Exhibit 8 and 9
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Share Price
60
(500)
Cum EVA
Share Price
Bibliography
Libby, P. Short, D. Kanaan, G. Gowing, M. Financial Accounting. 3rd ed. New York, NY: MH, 2008.
Scott, W. Financial Accounting Theory. 5th ed. Toronto, ON: Pearson, 2009.
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