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FedEx Company History • FedEx          – Business model conceived by Fred Smith (undergraduate term paper)          – Inve...
UPS Company History • UPS          – Company launched in 1907 as American Messenger Company, by Jim            Casey (19 y...
Enterprise Value Calculation Flowchart    EBIT = Revenue – COGS –                                       NOWC = OCA - OCL  ...
Historical Free Cash Flow (FCF)                   2008      2009       2010           2011    2012 FedEx            $(53M)...
General Assumptions for FCF Analysis General •    Global economic recovery timeline        – Reduced earnings forecasts in...
FedEx Assumptions for Future FCF FedEx •    Strategic acquisitions in growing global markets (Mexico, Poland, France      ...
FedEx Assumptions for FCF Analysis                               2013     2014     2015     2016       2017               ...
UPS Assumptions for FCF Analysis UPS •    FY13 rate increase        – 4.5% for UPS Air (4.9% for select destinations)     ...
UPS Assumptions for FCF Analysis                               2012     2013     2014        2015      2016               ...
Projected FCFs                      2012       2013      2014      2015      2016      2017 FedEx                $(415M)* ...
Bond Yields (rd) • FedEx        – 20-year bond, non-callable, non-transferable        – Price $102.50, YTM 2.337%        –...
Cost of Equity (rs)                        CAPM                FedEx             UPS                        rRF           ...
Weighted Average Cost of Capital (WACC)                                               WACC = wdrd(1 – T) + wsrs           ...
Enterprise Value & Stock Valuation                                    FedEx         UPS     PV of Terminal Value          ...
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FedEx vs UPS - Managerial Finance
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FedEx vs UPS - Managerial Finance

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  1. 1. FedEx Company History • FedEx – Business model conceived by Fred Smith (undergraduate term paper) – Invests $4 million of his own capital and raises an additional $91 million – Company launched in 1971 with FedEx Express • Provides transportation, e-commerce and business services • Four business segments: Express, Ground, Freight & Services • By 2009* – $35 billion in revenues – 6.9 million daily shipments – 694 Jets & 22,000 ground vehicles *Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.The Surviving 6 2
  2. 2. UPS Company History • UPS – Company launched in 1907 as American Messenger Company, by Jim Casey (19 years old) – Company renamed United Parcel Service of America in 1929 – Logistics services including: transportation, distribution, ocean and air freight, brokerage and financing • Three business segments: U.S. Domestic Package, International Package & Supply Chain, and Freight • By 2009* – $45 billion in revenues – 15.8 million daily shipments – 268 Jets & 101,900 ground vehicles *Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.The Surviving 6 3
  3. 3. Enterprise Value Calculation Flowchart EBIT = Revenue – COGS – NOWC = OCA - OCL YTM of bond CAPM Selling & Admin Expense NOPAT = EBIT(1 – T) ΔNOC = ΔNFA + ΔNOWC Cost of Debt (rd) Cost of Equity (rs) FCF = NOPAT - ΔNOC WACC = wdrd(1 – T) + wsrs Enterprise Value = FCF1(1 + WACC) + FCF2(1 + WACC)2 + … + FCF5(1 + WACC)5The Surviving 6 4
  4. 4. Historical Free Cash Flow (FCF) 2008 2009 2010 2011 2012 FedEx $(53M) $(304M) $619M $(47M) $(415M) UPS $5,101M $2,083M $2,224M $3,578M • 2009 Global Economic Recession – Significant drop in business & stock value – Sales revenues down for both FedEx and UPS • FedEx Express business segment hit the hardest • High fuel pricesThe Surviving 6 5
  5. 5. General Assumptions for FCF Analysis General • Global economic recovery timeline – Reduced earnings forecasts in 2012/13 – Trade volumes – High fuel prices • Corporate tax increase • Boost profits by increasing shipping ratesThe Surviving 6 6
  6. 6. FedEx Assumptions for Future FCF FedEx • Strategic acquisitions in growing global markets (Mexico, Poland, France and Brazil) • Cost Cutting Plan – Boost profits by $1.7 billion annually through shedding jobs, aircraft and underused assets – 3-year plan starting in 2012 • International Expansion – South Africa, Italy, Istanbul and TurkeyThe Surviving 6 7
  7. 7. FedEx Assumptions for FCF Analysis 2013 2014 2015 2016 2017 Sales 1.25% 1.75% 2.00% 2.50% 2.50% COGS/Sales 50.00% 50.00% 50.00% 50.00% 50.00% S&A/Sales 70.00% 70.00% 70.00% 70.00% 70.00% Tax Rate 37.50% 37.50% 38.50% 38.50% 38.50% CA/Sales 38.94% 38.27% 37.51% 36.60% 35.53% CL/Sales 23.00% 23.00% 23.00% 23.00% 23.00% • Weighted average of sales growth in past years = 1.65%. Expect small drop followed by increase with economic recovery • COGS + S&A based on previous average • Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase • Current Assets and Current Liabilities shown as percentage of total salesThe Surviving 6 8
  8. 8. UPS Assumptions for FCF Analysis UPS • FY13 rate increase – 4.5% for UPS Air (4.9% for select destinations) – 4.9% for UPS Ground • Expand main European air hub in Cologne, Germany by 70% – 190,000 packages per hour – Targeted completion in 2013 • Planned Acquisition of TNT in 2012The Surviving 6 9
  9. 9. UPS Assumptions for FCF Analysis 2012 2013 2014 2015 2016 Sales 2.50% 3.00% 4.00% 4.50% 5.00% COGS/Sales 50.00% 50.00% 50.00% 50.00% 50.00% S&A/Sales 80.00% 80.00% 80.00% 80.00% 80.00% Tax Rate 35.70% 35.70% 36.70% 36.70% 36.70% CA/Sales 29.00% 29.00% 29.00% 29.00% 29.00% CL/Sales 11.00% 11.00% 11.00% 11.00% 11.00% • Slow growth rate for 1st 2 years with subtle growth later • COGS + S&A based on previous average in 2011 • Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase • Current Assets and Current Liabilities shown as percentage of total sales in 2011The Surviving 6 10
  10. 10. Projected FCFs 2012 2013 2014 2015 2016 2017 FedEx $(415M)* $1,068M $1,048M $1,005M $1,013M $1,039M UPS $3,415M $3,753M $3,766M $3,903M $4,066M* Actual FCF The Surviving 6 11
  11. 11. Bond Yields (rd) • FedEx – 20-year bond, non-callable, non-transferable – Price $102.50, YTM 2.337% – Bond Rating BBB, low-medium grade • FedEx rd used as approximation for UPS rd – No qualifying bonds for UPS • Cost of Debt – rd = YTM = 2.337% – For WACC calculation….. rd = 2.337% * (1-.362) = 1.49%The Surviving 6 12
  12. 12. Cost of Equity (rs) CAPM FedEx UPS rRF 4.69% 4.69% RPM 7.74% 7.74% β 1.2386 0.8432 Cost of Equity 14.28% 11.22% DCF FedEx UPS Bond Yield + Risk Premium D0 $0.54 $2.28 Yield 2.337% D1 $0.58 $2.42 Risk Premium 5.00% P0 $91.46 $72.50 Cost of Equity 7.337% g 7.70% 6.17% Cost of Equity 8.34% 9.51%The Surviving 6 13
  13. 13. Weighted Average Cost of Capital (WACC) WACC = wdrd(1 – T) + wsrs FedEx UPS Wd 5.68% 0.048% rd 2.34% 2.34%* T 36.2% 35.7% Ws 94.32% 99.95% rs 14.28% 11.22% WACC 13.55% 11.21% *Cost of debt based in FedEx bond yieldThe Surviving 6 14
  14. 14. Enterprise Value & Stock Valuation FedEx UPS PV of Terminal Value $4,050M $21,318M PV of FCFs $3,600M $13,785M Enterprise Value $7,650M $35,103M Current Share Price $89.71 $73.43 Est. Intrinsic Share Value $12.49 $52.99The Surviving 6 15
  15. 15. Questions?
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