Financial Trends
Asset Trends
In terms of asset trends, the current ratio for FedEx, compared to UPS’s was low (Bruner and
Carr), as shown in the table below. One possible reason for this is that FedEx has chosen to rent many of
its fixed assets, which explains why their fixed charge coverage ratio is almost 1 and their capital
expenditure ratio is very low.
Company
Fedex
UPS
Current Ratio 2003
1.18
1.79
Current Ratio 2008
1.35
1.13
As a side effect of renting fixed assets, FedEx was holding significantly less cash than UPS at year
end. While the hoarding of cash could be seen as unnecessary exposure to credit risk, as the FDIC limits
the amount of cash insured to $100,000 at any given institution (FDIC.gov), the presence of cash could
potentially allow UPS to respond quickly if any new opportunities arise. One such opportunity was the
renovation of their Hong Kong hub to the tune of $100 million. The expansion saw UPS add aircraft,
ground equipment, and increased space for operations in Europe and Asia (Barling). Furthermore, the
expansion at the Hong Kong hub came as UPS announced growth of 40% for the first quarter compared
to prior year (Barling). This type of opportunity to increase capacity was most likely not available to
FedEx due to their financing arrangements.
Liability Trends
When assessing the trends in the company’s financial performance the implications of
expansion predicate the requisition of additional capital. A review of the pertinent case information and
the companies’ annual reports for fiscal year end 2003 indicated no liability arrangement that would
materially affect either company’s ability to secure additional debt financing. Please see appendix B for a
comparative chart showing each entity’s weighted average cost of capital for debt financing. While
FedEx appeared to have an advantage in regards to their cost of capital for long term debt, the
difference between the two companies was most likely due to increased risk as UPS held more debt
than FedEx at the close of business in 2003 (FedEx Corporation Annual Report). This however was not
likely to be a problem since UPS continued to hold a AAA bond rating (Bruner and Carr).
Equity Trends
In lieu of debt financing, either company could choose to finance the expansion through a
seasoned equity offer. According to the case, approximately 70% of FedEx’s common shares were held
by institutional investors (Bruner and Carr). This fact is pertinent because the overwhelming presence of
institutional investors could imply a risk averse attitude by both the Board of Directors and by
management. One reason for this is the tendency for large institutional investors such as CALPERS (the
California public employee retirement fund) to meddle in daily operations and to scrutinize earnings
(Williamson). However, the information contained in exhibit 8 of the case study shows clearly that the
stock price for FedEx had been rapidly increasing, due in part to anticipation of a jaunt into the Chinese
market. Please see Appendix A for a chart showing the historical share price movement from 1992 to
2003. The case for expansion being funded through equity is partially made from an analysis of ratios, as
listed below:
Ratio Name
Debt/Equity Ratio
Times Interest Earned
Fixed Charge Coverage
Capital Expenditure Ratio
Ratio Value
.28
10.51
.83
.22
The first two ratios clearly show that in 2003, FedEx had a manageable debt load as compared to
equity and was earning approximately 10 times the amount from operations to cover the minimum
interest payments (Bruner and Carr). The quandary then lay in the fixed charge coverage ratio, which
was very high; in addition to a high fixed charge ratio, the capital expenditure ratio was very low.
Obviously, the answer was that the company was choosing to rent fixed assets in lieu of purchasing
them outright (FedEx Corporation Annual Report). While this practice was not necessarily detrimental to
the financial health of the company, it limited the realistic financing options of the firm.
Based on the prior analysis, FedEx would be best served by a seasoned equity offering to help
fund the expansion into China. At the close of the calendar year 2003, the company had 299 million
shares outstanding with 800 million shares authorized (FedEx Corporation Annual Report). As such,
FedEx could theoretically issue the new shares at $10 par value, which was the same par value as the
existing shares, and set the price (conservatively) for new shares at $78 per share.
Par Value
Stock Price 12/29/2003
Price of New Shares
$10
$68
$78
Disregarding issuance costs, the company could issue 400 million shares at $78 per share and
raise approximately $31.2 billion to aggressively expand into China. Although this number appears large,
FedEx boasted a solid return on assets for the decade preceding 2003 and does not appear to be
susceptible to large scale service interruptions that could put that return in jeopardy. Finally, the
average income growth of 13.64% from 1992-2003 (Bruner and Carr) implied that FedEx would continue
the trend of profitability.
While UPS could choose to match the equity offering of FedEx, UPS could finance potential
expansion with their stockpile of retained earnings. The table below shows retained earnings for each
company at the close of business in 2003; UPS clearly has twice the balance of FedEx. One possible
reason for this discrepancy was that UPS had long been described as a fiscally conservative organization
(Bruner and Carr). Each organization’s internal growth rate is found in the table below as corroborative
evidence that either company could finance potential expansion with retained earnings. We defined the
internal growth rate for this analysis as:
𝑅𝑂𝐴 × 𝑏
1 − 𝑅𝑂𝐴 × 𝑏
Where return on assets (ROA) = net income/total assets; and b = the retention ratio.
12/31/2003
FedEx
UPS
Retained Earnings
$6,250 Million
$14,356 Million
Cash Flow from Operations
$1,871 Million
$4,646 Million
Internal Growth Rate
4.86%
6.91%
Finally, both companies showed positive cash flow from operations in 2003, but given the
magnitude of the difference and the aforementioned analysis, it appears that financial trends gave UPS
the advantage in expansion in to the Chinese market.
Works Cited
Barling, Russell. "UPS to spend US$ 100m on Hong Kong hub." South China Morning Post 8 July 2003:
Business Post 1.
Bruner, Robert F and Sean D. Carr. "The Battle for Value, 2004: Fed Ex Corp. vs. United Parcel Service,
Inc." Bruner, Robert F., Kenneth M. Eades and Michael J. Schill. Case Studies in Finance. New York:
McGraw-Hill Irwin, 2010. 53-73.
FDIC.gov. FDIC.gov. 8 February 20010. 8 February 2010 <http://www.fdic.gov/>.
FedEx Corporation Annual Report. FedEx Corporation Annual Report. Annual Report. Memphis: FedEx
Corporation, 2003.
Finance.Yahoo.com. FedEx Corp Share Price Chart. 2 February 2010. 2 February 2010
<http://finance.yahoo.com/echarts?s=FDX#chart3:symbol=fdx;range=19921201,20031231;indicator=vol
ume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined>.
UPS, Inc. UPS 2003 Annual Report. Atlanta: UPS, 2003.
Williamson, Christine. "CalPERS tightening its control over hedge funds." 20 April 2009. Lexis Nexus. 2
February 2010
<http://www.lexisnexis.com.dax.lib.unf.edu/us/lnacademic/results/docview/docview.do?docLinkInd=tr
ue&risb=21_T8461708775&format=GNBFI&sort=RELEVANCE&startDocNo=1&resultsUrlKey=29_T84617
08779&cisb=22_T8461708778&treeMax=true&treeWidth=0&csi=8094&docNo=14>.
Appendix A
(Finance.Yahoo.com)
Appendix B
Weighted Average Cost of Capital
5000
4500
4000
3500
3000
UPS
2500
FedEx
2000
1500
1000
500
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
UPS Financing w/debt
At first glance, the financial position of the United Parcel Service (UPS) leading up to the proposed
expansion into China mirrored that of its main rival, FedEx Corporation. Both boasted healthy growth
numbers and similar financial positions. UPS however, was in a prime position for raising capital at the
end fiscal year 2003. UPS most likely identified their potential and summarized it on the front page of
their 10k filing by declaring, “We See a World of Opportunity” (UPS, Inc., 2003). UPS’s options for
funding the expansion into China were either through debt, equity, or a combination of cash and
retained earnings. A careful review of their balance sheet indicated that either choice was feasible. UPS
enjoyed an astounding fixed charge coverage ratio of 36.41, meaning it was more than able to meet
their minimum interest payments (UPS, Inc., 2003). Conversely, a review of the 2003 annual report
revealed that the company had cash holdings in excess of $2 billion, and retained earnings in excess of
$14 billion. Internally funded expansion would be the most cost effective, but the presence of debt
would potentially offset any losses from early operations in a new market in the form of tax savings. If
additional funding was to be required, the increase would drive the debt to equity ratio up from the
2003 mark of .26; this figure was in line with the debt to equity ratio of FedEx for the same year (cite
case). The possibility of a seasoned equity offering was also in the realm of possibility, but due to the
large potential to incur cost, it does not appear to be an effective solution.
In 2003 UPS published an increase of capital spending over the prior year of approximately $300 million;
this capital expenditure increase contributed to an increase in sales of over $2 billion (UPS, Inc., 2003).
The willingness to invest in infrastructure for the expansion into Asian markets placed UPS in the driver’s
seat in the subsequent years. This investment, partnered with the selection of the Philippines as a hub
was a key contributor to the success of UPS.
Works Cited
UPS, Inc. (2003). UPS 2003 Annual Report. Atlanta: UPS.