TRANSPORTATION
INDUSTRY
Security Analysis
Student Managed
Investment Portfolio Class
Prof. P.V. Viswanath
Spring 2002
ANALYSTS

ELLEN MATUSHANSKY
 KENLEE ABRAHAM
 WAYNE LEE
 ERNEST R. LARENAS
CRITERIA FOR
STOCK SELECTION

Transportation industry-wide selection
 Create a unique list from S&P 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.
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
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 analyst’s knowledge and growth
potential of the each corporation.
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)
TRANSPORTATION SECTOR
Overview
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.

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.
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.
TOP SELECTION

We are recommending UPS as a Long
Term Buy based on the following
information
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 timedefinite delivery of packages and
documents throughout the United States and
in over 200 other countries.
Management
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12 member management committee
Corporate culture that stresses teamwork over individuality
CEO: Michael Eskew, An industrial engineer by training
Firm’s top strategist.
Daily Ops: Thomas Weidemeyer, a lawyer honed operational skills
by launching UPS Latin America.
Also built UPS’s 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 (1990’s)
Currently oversees non-package units, UPS Logistics Group and UPS
capital.
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% UPS’s rev.
 Op margins fell during recession to 15%
 Intl Ops ~ 14% UPS’s rev.
 Op margins have fallen sharply to barely 2%.
 Profitable in Europe and expanding throughout Asia.
Change on the Margin
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Most flexible Domestic op margin in industry.
1/3 of 370K workers part-timers.
Union contract clause: slow=option 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)
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)
Growth Vehicles
Fritz Companies(2001, CA) premier int’l
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 Int’l Bancorp (2001, CT) extends loans
backed by SBA & Export-Import Bank.
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 (hasn’t posted
profit yet on it).
 UPS higher profit margins. Better at costs
control and managing revenue mix.
Int’l Delivery Markets & Global
Logistics Market
INT’L
 DHL Worldwide Express dominant player.
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LOGISTICS MARKET
FedEx (not interested?)
Deutsche Post (DHL partner) pushing into U.S.
Exel (Britain’s)
TNT Post Group (Netherlands’)
Social Responsibility

UPS domestic trucks uses compressed
Natural Gas.
 Canada & Mexico trucks fueled by Propane.
 UPS foundation donated $40M last year.
Upside
Economy recovery boosts UPS’s bottom
line.
 Logistics Firms Counter cyclical?
 Smoother revs thru diversification.

Downside

Biggest risk is prolonged recession.
 Union Contract expires July 2002.
 Int’l Brotherhood Teamsters 15 day strike
(1997)
 Contracts renegotiated every 5 yrs

UPS Stock
Price & Volume

Recent Price $ 60
 52 Week High
$61.55
 52 Week Low $
46.15
 Avg Daily Vol
(Mil)1.57
 Beta 0.66
2-stage FCFE Discount Model
Analysis on UPS: Inputs
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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%
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)
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*same growth rate in capex, deprec & revenues
Fair Valuation
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Recent price $60.
25X 2002 estimate of $2.24
Analysts Expects 15% in 2003.
UPS trading premium to FedEx & S&P.
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.
Conclusion

Change of margin
 Multiple Growth areas
 Stability
 Infrastructure in place UPS Airlines (9th
largest U.S./11th Worldwide)
Other firms Considered

We also looked at these firms, but after a
thorough analysis decided it wasn’t in our
best interest to recommend.
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.
CHRW Management

Verdoorn, D.R. Chairman of the Board.
Expected to
Retire in 2002.
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Wiehoff, John P. President, Chief Executive Officer.
Expected to replace Mr. Verdoorn.

Butzow Barry W. Senior Vice President, Office of the
President and Director.
CHRW Stock
Price & 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.
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.

EXPD Stock
Price & 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.
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 Stock
Price & Volume
Recent Price $ 24.05
 52 Week High $ 30.23
 52 Week Low $ 8.04
 Avg Daily Vol (Mil) 0.50
 Beta 1.39
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