W H I C H F I R M I S D O I N G B E T T E R F I N A N C I A L L Y ?

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Founded in 1971 from the idea of Fred Smith’s Yale economic term paper.
What was innovative about the new approach and how did this differ from competition?
Was this an operational success?
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Founded in 1907
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What is meant by “Big Brown”
What was the key UPS “pillar of success”?
Held private until 1999

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How has competition in the air-express market effected both companies.
What external factors are effecting the strategies of the firms?
What internal factors are effecting the strategies of the firms?

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How has competition in the airexpress market effected both companies.
What external factors are effecting the strategies of the firms?
What internal factors are effecting the strategies of the firms?
 Can either firm obtain and sustain a competitive advantage? Why or
Why not?

 By 2004 Airfrieght carried nearly 50% of international trade by volume.
What about UPS and FedEx?

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What happened in 2004 to alter the marketplace? How did this effect
FedEx stock price compared to UPS?
How are we to interpret the change in market value?

Considerations:
Financial Statements
Financial Ratios
Stock Performance
Economic Profit
1. Direct inspection of the financial statements
2. Financial ratios
3. Earnings per share (EPS) and price/earnings ratios
4. Total returns to investors
5. Economic profit (EVA)
Strengths
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Reveals trends
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Comparison of absolute sizes
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Adjusts for size differences (a relative, not absolute, measure)
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Provides comparative measures of efficiency
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 and growth
Widely-used measures of performance
Linked to market price of stock
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Cash flow based
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Market value based
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Permits benchmarking vs. other investments
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Risk adjusted
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Permits benchmarking
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Theoretically linked to market values
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Logically appealing
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Increasingly widely used
Weaknesses
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Does not permit a ready assessment of efficiency
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Biased by size differences
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Book, not market, values
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Influenced by GAAP choices
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Backward, not forward,
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 looking
Based on book, not market, values
Influenced by GAAP choices
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EPS influenced by GAAP choices
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EPS is not a cash flow
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P/E difficult to interpret
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Sensitive to choice of
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 observation period
Sensitive to choice of observation period
Needs to be risk adjusted
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Influenced by GAAP choices
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Ignores latent option values

Financial ratio analysis
Activity
Liquidity
Leverage
Profitability
Growth
EPS
EPS compound annual growth rate
(CAGR) 1993–2003
EPS compound annual growth rate
(CAGR) 1999–2003
Total market returns
Cum. total return (1992–2003)
Cum. return net of S&P (1992–2003)
Economic profit
EVA 2003
Cumulative for 1992–2003
EVA
Market value added
Difference
FedEx
Improving
Improving
Declining
Worse than UPS
High
27.54%
6.98%
528.02%
372.83%
(in millions)
$170
($2,252)
$11,191
$13,443
UPS
Weakening
Better than FedEx
Consistently low
Better than FedEx
Lower than FedEx
13.89%
34.30%
705.95%
550.75%
(in millions)
$1,195
$4,328
$62,028
$57,700
Source
(case exhibit number)
2, 3
8
8
9, 10

 How is financial excellence defined?
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Operational excellence does not guarantee financial excellence
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Consider corporate lifecycle (easier to grow a smaller firm than a larger one)
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FedEx? Why and what drives your decision?
UPS? Why and what drives your decision?

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UPS: Continues to have higher Revenue, ROC, & ROA
FedEx: Still a growth firm and is only at 23% Debt to Capital
Long-term growth looks more promising for FedEx with a five-year earnings growth outlook expected to be well over 12 percent. UPS will likely see just over 9 percent growth over the same period.

W H I C H F I R M H A S B E T T E R O P E R A T I O N S ?
W H I C H F I R M I S D O I N G B E T T E R F I N A N C I A L L Y ?