The Battle for Value
Andrew Hall
Team One
22nd May 2008
Contents
Management Summary ................................................................................................................................ 2
Objectives ..................................................................................................................................................... 2
Sustainable Competitive Advantage ............................................................................................................. 2
Enabling Factors....................................................................................................................................... 2
FedEx .................................................................................................................................................. 2
UPS...................................................................................................................................................... 3
Inhibiting Factors ..................................................................................................................................... 3
FedEx .................................................................................................................................................. 3
UPS...................................................................................................................................................... 3
Conclusion................................................................................................................................................ 3
Interpretation of the 14% Increase in FedEx’s Market Value of Equity........................................................ 3
An Efficient Stock Market ........................................................................................................................ 3
FedEx and UPS share price and liberalized air cargo routes between the U.S. and China ...................... 3
Conclusion................................................................................................................................................ 3
Financial Statement Analysis ................................................................................................................... 4
Ratio Analysis ........................................................................................................................................... 4
Activity Ratios ..................................................................................................................................... 4
Liquidity Ratios ................................................................................................................................... 4
Profitability Ratios .............................................................................................................................. 4
Growth ................................................................................................................................................ 4
Stock-Price Performance ......................................................................................................................... 4
Economic Value Added ............................................................................................................................ 4
Market Value Added ................................................................................................................................ 5
Conclusion................................................................................................................................................ 5
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Excellence in Business ................................................................................................................................... 5
UPS ........................................................................................................................................................... 5
FedEx........................................................................................................................................................ 5
Conclusion................................................................................................................................................ 5
Conclusions ................................................................................................................................................... 5
Appendices.................................................................................................................................................... 5
Management Summary
Objectives
This report seeks to answer the following four questions about UPS and FedEx:
1. What are the enabling and inhibiting factors facing the two firms as they pursue their goals? Do
you think that either firm can attain a sustainable competitive advantage in this business?
2. Why did FedEx’s stock price outstrip UPS’s during the initiation of talks over liberalized air cargo
routes between the U.S. and China? Assuming a perfectly efficient stock market, how might one
interpret a 14% increase in FedEx’s market value of equity?
3. How have FedEx and UPS performed since the early 1990s? Which firm is doing better? Discuss
the insights you derived from the two firms’ financial statements, financial ratios, stock-price
performance, and economic profit (economic value added or EVA).
4. If you had to identify one of those companies as excellent, which company would you choose?
On what basis did you make your decision? More generally, what is excellence in business?
Sustainable Competitive Advantage
Enabling Factors
FedEx
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Deregulation
Operational Excellence – TQM – Execution – Technology – saw off competition for USPS
Cost cutting – lower price increases that UPS
Innovation – Hub and Spoke – Own Planes
Employee Participation
Strength in Air Express Market
Heavy Investment in Asia
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UPS
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Size
Strong in all sectors of Market
AAA Bond Rating – Financial Strength
Able to price cut to establish market share
Investment in Technology
Inhibiting Factors
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Economies of Scale
Competition – Imitation (Emery Air Freight, USPS)
FedEx
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Poor financials BBB Bond Rating
Withdrawal from Europe
Concentration on Air Express Market
UPS
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Slower growth
Size and Age
“Resting on Laurels”
Conclusion
Interpretation of the 14% Increase in FedEx’s Market Value of Equity
An Efficient Stock Market
What would this mean under:
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Strong Efficiency
Semi Strong Efficiency
Weak Efficiency
FedEx and UPS share price and liberalized air cargo routes between the U.S.
and China
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Agreement – 5 times as many commercial cargo flights, any airport
General – Air Cargo expanding at 30% a year, expected to continue for next 5 years
FedEx currently 11 flights a week, 220 cities, volume growth > 50%
UPS currently 6 flights a week, 200 cities
100 flights up for grabs – who can raise the capital?
Conclusion
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The stock price is the PV of future cash flows
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Market expects liberalization to increase the PV of FedEx’s future cash flows by more that the
increase in UPS’s future cash flows
Financial Statement Analysis
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Trends
Absolute size
Disadvantages
o Backward looking
o Based on GAAP
Ratio Analysis
Activity Ratios
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FedEx improving UPS weakening
Days Receivables outstanding – FedEx constant – UPS increasing: are UPS competing on credit
terms?
Working Capital Turnover – FedEx higher – UPS lower: UPS has more working capital
Fixed Asset Turnover – FedEx marginally higher that UPS
Total Asset Turnover – FedEx higher than UPS – points to greater use of lease or rental of
equipment
Liquidity Ratios
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UPS is significantly more liquid than FedEx
Profitability Ratios

UPS is more profitable on every measure
Growth
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FedEx is growing more strongly on every measure other than EPS
EPS Growth rates analysis
Stock-Price Performance
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Fed Ex saw 22% gain compared to UPS 14% gain between June 2003 and June 2004
Longer term UPS has given stock holders better returns – 551% between X and Y
Compared with FedEx 373% same time period
Both much better than S&P 500
CAGR in share prices !
Economic Value Added
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FedEx destroyed value each year from 1992 to 2002 – Exhibit 9
UPS destroyed value 1992 to 1996, and created value 1997 to 2003 – Exhibit 10
Graph to make point
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Weaknesses of EVA
o Relies on GAAP
o Not predictive
o Ignores strategic option value
 Mastery of special skills and technologies
 Presence in markets
Market Value Added
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Positive for FedEx increasing at CAGR of (11,816/625)^(1/12) – 1 per year
Positive for UPS increasing at CAGR of (69,315/7,287)^(1/12) – 1 per year
Graph to make point
Conclusion

UPS financial performance is excellent and stronger, in most areas, than FedEx’s financial
performance
Excellence in Business
UPS
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Financially excellent and achieving operational excellence
FedEx
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Operationally excellent, but not financially excellent
Conclusion
Conclusions
Appendices
The Battle for Value
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