Ups

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Ups

  1. 1. United Parcel Service, Inc Stock Information Symbol NYSE:UPS Recent Price $76.47 Revenue by Segment Intl Package Beta 0.91 21% Market Cap $75.78B P/E (ttm) 21.97 Domestic Supply Package Chain & Short Ratio 2.80 Freight 58% 12 mo. Range $56.47—$77.00 21% February 22nd, 2011 Price Target $88.43 Monideepa Chakravorty Alex Khan Joe HilbornTTM performance of NYSE:UPS vs S&P500 (UPS top trend line, S&P500 bottom trend line) Reasons to buy UPS  Strong growth in overseas markets  Pricing power to increase rates and pass on higher energy costs  Potential for dividend income (2.72% yield)  Expansion into new profitable business segments including supply chain management and healthcare logistics  Projected growth in world air freight  High operating margins Recommendation: Buy 900 shares of UPS at a NAV of $68,814
  2. 2. Table of Contents Qualitative Analysis Investment Thesis ........................................................................................................................................... 2 Company Business Model .............................................................................................................................. 3 Strategy ........................................................................................................................................................... 4 SWOT ............................................................................................................................................................. 5 Recent Alliances/Partnerships ........................................................................................................................ 6 Recent News ................................................................................................................................................... 6 Surprise Analysis ............................................................................................................................................ 8 Z-Score Analysis ............................................................................................................................................ 9 Industry Analysis .......................................................................................................................................... 10 Porter’s Five Forces ...................................................................................................................................... 11 Macroeconomic Analysis ............................................................................................................................. 12 Competitors .................................................................................................................................................. 13 Quantitative Analysis Financial Ratios ............................................................................................................................................ 14 Dividend Growth Model............................................................................................................................... 20 Pro Forma Income Statement ....................................................................................................................... 21 Valuations P/E ......................................................................................................................................................... 22 P/S.......................................................................................................................................................... 24 EV/EBITDA .......................................................................................................................................... 25 DCF ....................................................................................................................................................... 26 Price Target .................................................................................................................................................. 28 Conclusion .................................................................................................................................................... 28 Appendix ...................................................................................................................................................... 29 1
  3. 3. QUALITATIVE ANALYSISInvestment ThesisUPS Comparative Advantage  End-to End Global Service Portfolio: UPS is the only competitor in the industry that handles all levels of service (express, ground, domestic, international, commercial, residential) through its integrated pickup and delivery network.  Sustainability1: UPS utilizes vehicles that operate on compressed natural gas, liquefied natural gas, propane, hydrogen fuel cell, electric and hybrid electric power plants.  Customizable Supply Chain Solutions: Has a variety of logistics partnerships with retail, healthcare and high tech companies like Amazon, Merck and Toshiba.  Tracking-and-Tracing IT Platform: Consistently investing in Information Technology to give customers better knowledge of tracking their packages. They have recently enhanced tracking to include more descriptive statuses and special messaging to inform of unexpected delays.  Brand Equity: Built a leading and trusted brand that stands for quality service, reliability and product innovation. It is synonymous with parcel delivery and logistics. In 2010, UPS was ranking #16 among the 100 most valuable global brands.2  Financial Strength: UPS has demonstrated high capital efficiency and strong cash flow generation throughout its history. Despite its vast network, UPS has been able to produce high end returns, with a six-year average ROE of 28% vs. 10% for FDX. The ability of UPS to consistently grow cash will allow the company to maintain growth through internal initiatives, make acquisitions, maintain an attractive dividend, and continue aggressive share buybacks.Why Now?  Economic Turnaround: UPS volumes trend with the economy, which is rebounding in all regions. In 2009 and 2010, UPS instituted a number of cost savings initiatives across the company which becomes more evident in 2011when there is margin expansion and more leverage to the bottom line. In fact, management is forecasting 2011 to exceed the peak earnings level recorded in 2007.  International growth: UPS provides shipping and logistics services all over the world and will benefit from global trade trends. There is specifically a high potential for growth in Asia. In 2010, the company increased capacity out of Asia by over 40% to capture demand. In 2011, UPS is adding additional capacity by expanding their air fleet, adding two 747-400s as well as five additional 747s. The decision to expand their air fleet shows that UPS expects to see continued market share gains in 2011 across the International and Freight divisions. Many companies are expanding to the use of airfreight to better manage lean inventories and their supply chain and as a way to minimize warehousing and other costs associated with maintaining large inventories. This growth in airfreight would be a significant shift since only 2-3% of the world’s international freight is carried on a plane.  Cash Position: Uses of cash for 2011 include share repurchases of up to $2 billion which is up from the $800 million in 2010 and capital expenditures of $2.2 billion. Dividends are also a high priority for UPS and are expected to roughly increase at a rate of 2.53%.3  Long term play: While 2011 may not be the most groundbreaking year, UPS will see gains and ultimately will see operating margins at the levels they were before the financial crisis. UPS appears to be in the early stages of operating margin recovery, rebounding from 2009 lows. Currently UPS is 300 bps below its peak consolidated operating margin of 14.4% posted in 2005. Also, DHL‖s exit from the domestic market give UPS higher pricing power.1 UPS Fact Sheet2 Millward Brown Optimor Ranking3 Q4 Earnings Conference Call 2
  4. 4. Risks  Slowdown in global economy: The amount of operating leverage UPS has could reverse any positive trends. Recent efforts to increase yields could be damaged if there is softer demand as package volumes and a move to lower yielding services would apply pressure to both margins and yields. UPS may find it difficult to meaningfully cut costs because of the breadth of its network if there is another downturn.  Economic cyclicality: The transportation industry is subject to cyclical factors, including economic condition, customer’s business conditions, credit markets, and seasonal patterns, which may adversely affect customer shipping volumes and industry freight demand.  E.U. Credit Issues: With roughly 25% of UPS’s revenue as international, with more focus on Europe, E.U credit issues could hinder UPS’s international growth plans.  Rising Labor Costs4: UPS’s model is labor intensive with compensation accounting for 60% of operating expenses. Also, almost 60% of UPS workers are unionized through Teamsters and the current contract expires in 2013. The last union-organized strike was in 1998.  Fluctuating Fuel Prices: Higher prices coupled with lower demand would impact the margins negatively as consumers may look for lower-cost but SLOWER parcel delivery methods.Company Business ModelUPSUnited Parcel Services (UPS) is the premier source for global transportation and logistics solutions. Founded in1907, UPS has navigated successfully through several recessions and was able to reinvent itself throughout thecentury. UPS’s logistics model is built on a hub and spoke network for pickup, delivery and sorting terminalsacross the U.S. and the world. The company’s largest domestic hub is in Louisville, KY with major internationalhubs in Cologne, Germany and Taipei, Taiwan.Company Segments (Percentage of 2010 Q4 Revenue) U.S. Domestic Package (60%) International Package (22%) Supply Chain and Freight (18%)  Ground (70%)  Export (74%)  Forwarding & Logistics (69%)  Deferred (10%)  Cargo (5%)  Freight (26%)  Next Day Air (20%)  Domestic (21%)  Other (5%)Sources of Revenue 1. U.S. Domestic Package5: This group provides guaranteed air and ground delivery of small packages, documents, and time definite delivery of heavy weight packages to the entire U.S. In 2010, revenue rose 7% YoY to $8.1 billion. Margin expansion was driven by strong growth in volume, higher yields, and improved efficiencies. Average daily volume inched up 1.7% YoY on strong growth in Ground and Next Day Air. As evident in the graph above, UPS Ground, a component of Domestic Packages is strengthening in Avg Daily Packages.4 Lazard Report5 Q4 Company Presentation 3
  5. 5. 2. International Package6: This segment provides air and ground delivery, both domestic and export, to more than 200 countries and territories. UPS provides guaranteed express delivery to over 50 countries outside of the U.S. In 2010, revenue and operating profit increased 9.2% and 15% YOY, respectively. Export average daily volume rose 8.7% year over mainly from more than 30% export growth in China. Exports from Europe showed solid performance with double-digit growth in Germany. As seen in the figure below, international exports are growing at a rapid rate. 3. Supply Chain & Freight: The supply chain group provides freight forwarding, logistics, distribution, customs brokerage, capital, and other services to various industry verticals and customers around the world. The freight segment provides nationwide regional, inter-region and national Less-than-Truckload service across the U.S., Canada, Mexico, and other territories. Over the year, revenue climbed 12. 8%. Profits increased on stronger revenue in UPS Freight as well as the Forwarding and Logistics business.Strategy Operating Margins: DHL and the recession challenged UPS’s pricing power in the past three years, especially in the Domestic market. However DHL exited the market in 2009 and the economy is recovering. UPS focuses on returning on historic margin levels in the domestic business by cutting costs and creating greater efficiencies in their network. Continue International Expansion7: While international revenue is roughly 22% of total revenue we see potential growth. In 2010, international volume increased 13.6% to a record 2.3 million packages per day and airlift out of Asia increased 40%. While nearly 50% of international revenue is from Europe, Asia is UPS’s main focus for growth. At the beginning of fiscal 2010, UPS added a new air hub in China and has already seen growth in demand. In fact, in UPS is set to buy freighter capacity in 2011 to capture the airfreight demand internationally. Increase Success of Customized Supply Chain Solution: UPS’s growth strategy is to increase the number of customers benefiting from supply chain solutions, particularly in the healthcare, retails, and high tech sectors, and to increase the amount of small package transportation from these customers. UPS intends to leverage small package and freight customers through cross-selling the full complement of UPS services.  Healthcare Supply Chain: An aging population is putting pressure on the healthcare systems around the world. Besides delivery speed, strict temperature control, chain of custody and other regulations must be used to ensure quality and reliability of every delivery. In the past four years, UPS’s healthcare facility footprint has doubled, signaling a surge in growth of customer needs.6 Q4 Company presentation7 BB&T Report 4
  6. 6. Healthcare is a fast-growing sector and UPS’s capabilities match well to the needs of the sector. Today, UPS has nearly 30 healthcare facilities in Asia, Europe, Canada, and the U.S and are continuing to invest and expand their footprint in this industry.SWOT AnalysisStrengths  Sustainability: UPS is the environmental leader in the U.S. package delivery industry. UPS reduces its carbon footprint through its integrated network, modern airfleet, alternative fuel sources, and extensive use of rails.  Network: UPS has an established network and continues to make investments to expand its network, especially in China.  Superior Financial Strength: UPS is known for maintaining higher operating margins than its competitors. It is highly profitable, averaging a 28% ROE for the past six years.  Dividend Value Strength: Has consistently increased dividends annually with the exception of 2009, at which it was kept constant. Since 2000, Dividend yield has increased by an average of 2.53% annually.  Brand Equity: UPS is synonymous with parcel delivery. The brown color scheme of its logo and delivery trucks is iconic to the delivery industry.Weaknesses  Brand Lag: While UPS’s brown trucks are recognizable, people may not have a complete picture of UPS’s full range of capabilities.  Unionization: UPS’s labor force is unionized and has therefore impacts UPS’s labor costs. The threat for strikes could pressure UPS to increase wages.  Debt: UPS has higher debt financial ratios than its competitors. However, with theOpportunities:  Olympic Games: Selected to manage the transportation and logistical operations of the London Olympic Games in 20128  Business to Business Growth: Increase in B-to-B growth will help expand operating margins due to economies of scale.  Asian Market: By increasing customer’s expectation of higher quality products, UPS has the potential to expand in a fragmented Asian market. They first infiltrate the market by partnering with a key business player in the market with a focus on exports/imports. After this, they will pursue acquisitions and more of a domestic play.  Logistics Solutions Business: UPS leverages its network by providing logistics solutions for retail and manufacturing companies. This growing business had been expanding double digits pre-recession and in 2009 these revenues decreased by 20%. However, this has recently reversed due to their ―We Love Logistics‖ campaign.  Global Healthcare Distribution Network: New facilities are being added in the U.S., Asia, Europe, and Canada to accommodate rapid growth in healthcare.  Yield Growth: While DHL, who had priced down the market, left the U.S. parcel market more than two years ago, we believe that full pricing power was partially delayed since shipper contracts are usually 1-3 years. Therefore, UPS could be increasing profit margin by having more price control.  United States Postal Service Volume Decline: Over the last 10 years, the USPS has steadily lost share to UPS and FedEx. Their continued decline could yield modest volume gains for UPS8 2009 UPS Annual Report 5
  7. 7. Threats9  Rising Fuel Prices: UPS charges fuel surcharges to their domestic and international package and LTL services as their primary means of reducing the risk of adverse fuel price changes. They also periodically enter into option contracts on energy commodity products to manage price risks associated with forecasted transactions involving refined fuels like jet fuel.  Challenging Weather Conditions: Bad weather can hurt volume and impact efficiency in delivery of goods. In addition, bad weather can impact retail sales and other groups UPS partners with which may hurt revenues. While UPS cannot control the weather, they have improved their tracking platform for customers by providing more information and an updated delivery time to customers in the event of unexpected delays.  Currency Headwinds: Currency translation headwind within their international business could impact cost inflation. However, UPS has delivered strong cost side and margin performance in 2010 that we believe makes them competitive with others in the industry. With over a century of experience, we believe UPS has expertise in foreign currency hedging activities using derivate financial instruments like currency forward contracts and currency options.  Pension Fund Liability: In 2007, UPS added $6.1 billion in debt to restructure pension program. If the fund is not producing adequate returns, UPS is obligated to pay from their operating income to meet required distributions.Recent Alliances/PartnershipLondon 2012 Olympic Games: UPS will serve as the Official Logistics and Express Delivery Supporter of the2012 Olympic Games. UPS will be responsible for the pick-up and delivery of everything from documents toheavy freight as well as the operation and management of the Games Logistics and Command Centre, where allthe materials associated with the Games will be inventoried, warehoused and processed. In addition, UPS willprovide logistics planning services to ensure optimal efficiency in the Olympic supply chain and customs to getshipments cleared through customs quickly and efficiently.UPS Trackside: UPS is the official express delivery company sponsor for NASCAR and will deliver to vendors,NASCAR family members, and to NASCAR equipment. This partnership is from middle of February toNovember 2011.Red Cross: UPS will take part in a charitable initiative to increase Logistics Emergency Teams for AmericanRed Cross chapters. Through this effort, UPS will provide logistics expertise, transportation and warehousing tolocal Red Cross Disaster Servicers Coordinators in the event of a large, scale emergency.Recent NewsMANAGEMENT GUIDANCEOn February 2nd, UPS announced almost a 44% improvement in earnings over the prior year period. Globalrevenue grew 8.4%, increasing adjusted operating profit by almost 40%.Management will also place high priority on service and technology enhancements for 2011. This includeshigher visibility to customers by providing more tracking information details like a status bar and specialmessages for unforeseen events.9 Q3 2010 Report 6
  8. 8. In a recent earnings call, management expected to increase share repurchase substantially from $800 million in2010 to $2 billion in 2011.GLOBAL EXPANSIONUPS Express Freight goes to Israel and Slovakia. The expansion of service lets it serve expanding hubs forhigh-tech, industrial and automotive companies. Israel is a key destination in the high tech sector, which majorplayers in the industry maintain operation in the county. Slovakia has developed as a key center for automotiveand industrial manufacturing, representing manufacturing operations of some of the world’s largest automakers.10UPS Capital, the financial services arm of UPS has plans to expand its Latin American presence by openingnew offices in Bogota, Colombia and Lima, Peru to help facilitate global trade. This would impact the ―Other‖segment of Supply Chain & Freight, which has the most growth potential. (helps give loans to qualifiedinternational businesses)In addition, UPS has also bought 7 new planes, a sign of growing demand and a need to increase their capacity.FRANCHISE EXPANSIONThe UPS Store, a system of independently owned retail shops for shipping, print and other business services, haslined up nearly $23 million in loans for franchises and expects new credit access to spur 40% more storeopenings this year than in 2010. They have set an aggressive goal to sell 120 new franchises in the U.S. for2011. More stores will be added in ―nontraditional‖ locations such as in hotels or college campuses. An increasein franchises would provide growth for the ―Other‖ segment component of Supply Chain & Freight. As of lastquarter, this segment contributed around 17% to quarter revenues.HEALTHCARE SECTOR GROWTH11UPS is seeing increased demand from healthcare manufacturers wanting more agile supply chains. In January,UPS announced a significant expansion of global healthcare distribution facility networks to accommodatecontinued rapid growth in its healthcare business. The new facilities will be located in Kentucky, Singapore,Venlo (the Netherlands), Burlington (Canada). All of these facilities are strategically located near internationaland UPS air hubs.10 www.bizjournals.com11 UPS Press Release: January 4, 2011 7
  9. 9. “WE ♥ LOGISTICS” CAMPAIGN Since September 2010, UPS has started a new advertising campaign to demonstrate how it has vaulted pastcompetitors to offer the broadest range of logistics services in the industry and will focus on the theme ―We LoveLogistics‖ to reflect UPS’s passion for delivering transportation and supply chain solution that can help bothlarge and small businesses compete better. This is UPS’s first campaign that advertises for all of their globalservices. The purpose for this is to associate a new definition to logistics and to show the complex system andnetwork involved to make it successful. In Fall 2010, this campaign debuted in the U.S., China, the U.K., andMexico. It will debut in other markets around the world in the beginning of 2011.Surprise Analysis12In the past six quarters, UPS has beat market EPS expectations. In the four most recent quarters UPS has beatenEPS estimates by more three cents or more—leading to more than a 2.6% surprise. Surprise analysis isimportant, because typically when there are positive EPS surprises, the share price will increase. Also, a positivesurprise may imply that the market is undervaluing the stock and that the company is performing and exceedingexpectations.12 Reuters 8
  10. 10. Z-Score Analysis13One of UPS’s weaknesses is its use of debt which has steadily risen over time. Therefore, based on this long termdebt trend, we decided to perform a Z-Score Analysis to assess the probability of UPS going bankrupt in the nexttwo years.Altman’s equation is:Z = 0.012T1 + 0.014T2 + 0.033T3 + 0.006T4 + 0.999T5Where,T1 = Working Capital / Total AssetsT2 = Retained Earnings / Total AssetsT3 = EBIT/ Total Assets Variable InputsT4 = Market Value of Equity / Book Value of Total 2009 2010 Q3Liabilities Working Capital 3036 3955T5 = Sales/ Total Assets Retained Earnings 12745 13603 EBIT 3811 5325* Sales 45297 48501* MV of Equity 57025.78 66089.79Zones of Discrimination: Total Assets 31883 32907Z > 2.99 -―Safe‖ Zones1.8 < Z < 2.99 -―Grey‖ Zones BV of Liabilities 24187 24381Z < 1.80 -―Distress‖ ZonesUsing this equation, we calculated a Z-Score for year end 2009 and the year end 2010 Q3.2009: 1.2(.095) + 1.4(0.4) + 3.3 (0.12) + 0.6(2.358) + 0.999(1.421) = 3.9022010 Q3: 1.2(0.12) +1.4(0.413) + 3.3 (0.162) + 0.6 (2.711) + 0.999(1.474) = 4.356While debt rises, UPS bolsters even further into the ―safe zone‖ and decreases the probability of UPS goingbankrupt. A large part of its safety status is driven by EBIT and Sales and its overall operational improvementsin operating margin, network efficiency, and cost reductions. Its profitability strength allows UPS to increase itsuse of debt. Therefore, we do not see UPS’s use of debt as a weakness.13 Edward Altman, UPS 2009 10k, UPS 10Q* 2009 Q4 was used to adjust for EBIT and Sales figures in 2010 Q3 9
  11. 11. Industry Analysis 14UPS is in the air delivery and freight services industry. This is a broad industry and is made up oflogistics companies such as UPS, state-owned postal systems, the cargo divisions of airlines, and otherlogistics and freight companies.Industry Trends  The industry has and will continue to experience growth as firms turn to outsource their operations to third party logistics companies.  Additional need for freight will come as the demand for shipping consumer goods grows with a shift towards e-commerce and online shopping.  Some companies, such as UPS, have grown and transformed their business to encompass a wider view of the logistics process to create a competitive advantage and boost revenues. For example, the two largest players in the industry, UPS and Fedex, have both created ―drop-ship‖ solutions by integrating their operations with warehouses of online retailers, such as Amazon.com15.  Managing the entire logistics process allows customers to focus on core business and the industry to achieve greater economies of scale  There is a growing market for healthcare industry logistic solutions. UPS has 3 million sq ft of warehouse space that is compliant with health regulations and standards. This includes managing new orders and accounts receivable.16Market Players  In the worldwide shipping market, Fedex and UPS dominate business, accounting for more than 80% of revenues  In local metropolitan markets, the industry is much more fragmented due to small-volume and limited-footprint couriers.  This difference between geographic markets exists because of the barriers to entry: larger companies require more capital expenditure for investments such as aircraft, vehicles, and warehouses while local companies have less fixed capital needs and primarily increase labor as their business increases.Alliances and Competition  The delivery portion of the shipping business faces both competition and alliance from the postal system.  In the United States, USPS has increasingly become a competitor to shipping companies business as they have also moved away from exclusively letter delivery and expanded offerings in package and freight shipments.  USPS has forged alliances with its competitors to tender packages to Fedex for some delivery routes including international shipments.14 http://trinity.firstresearch-learn.com/industry.aspx?chapter=0&pid=40815 Amazon.com 2009 Annual Report16 http://www.ups-scs.com/solutions/healthcare.html 10
  12. 12. Porter’s Five ForcesNew Entrants – Low  UPS has established brand equity  Long term contracts with corporate customers  Capital intensive industry that involves aircraft, vehicles, software, and warehousesSubstitutes – Medium  Some customers with non-time sensitive logistics needs can trade down to using slower and less expensive delivery options, such as USPS  Firms may create their own in-house supply chain and logistics solutions rather than outsourcing the operations to a company such as UPS  Threat to letter delivery business as a result of a movement towards electronic documentsSupplier Power – Low  UPS does not rely on specific suppliers to operate their business outside of major capital expendituresBuyer Power - Medium  Smaller customers have less ability to negotiate prices because prices are fixed  Larger companies using full logistics solutions have more pricing power due to the ability to negotiate long term contractsCompetitive Rivalry - High  Closest competitor, Fedex, has similar offerings in freight and logistics business  UPS focuses on growth overseas and expansion in supply chain business  Comparable prices across industry 11
  13. 13. Macroeconomic AnalysisEconomic Outlook for 201117,18  The January report from the Bureau of Labor Statistics reported that the unemployment rate fell to 9.0%. Some of this decline is related to people leaving the job market and stopping their search for employment rather than an increase in the employment rate.  Overall employment in most industries remained fairly constant  Employment in retail trade, healthcare, and manufacturing segments experienced the largest amount of growth.  Growth in manufacturing jobs is favorable for economic growth, as indices such as PMI are leading indicators of economic growth.  Rapid increase in many commodity prices forecasted, including that of energy prices  The United States had positive GDP growth in the second half of 2009 and all of 201019  The Federal Reserve raised their projection of GDP growth in 2011 to 3.9%20UPS in the Economy  Manufacturing growth in not only favorable for the economy as a whole, but UPS will directly benefit and larger quantities of manufactured goods enter their logistics chain to reach their destinations  Rising energy costs have the potential to impact profits in the company’s delivery business  UPS is able to stabilize cash flows related to variable energy costs by hedging using futures contracts as well as an additional fuel surcharge to pass on higher costs to their customers  Expansion in healthcare jobs is positive and coincides with UPS’ goals to increase their Global Healthcare Network, a new area of profit for the company17 http://www.ism.ws/ismreport/mfgrob.cfm18 http://www.bls.gov/news.release/pdf/empsit.pdf19 http://www.bea.gov/national/index.htm#gdp20 http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20110126.pdf 12
  14. 14. CompetitorsFedEx Corporation21(NYSE:FDX) operates severalbusiness segments that competedirectly with UPS includingFedex Express, FedEx Services,and FedEx Ground. Thecompany provides various solutions for transportation and delivery, logistics, e-commerce, andbusiness services. The company provides various package delivery and outsourced business services.FedEx SmartPost is a subsidiary of FedEx ground that contracts with the United States Postal Systemtransport deliveries across regions.CH RobinsonWorldwide, Inc22(NASDAQ:CHRW) is a thirdparty logistics provider thatcontracts with transportationcompanies around the world toarrange logistics services for their customers. CHRW does not own any of the transportation systemsto move freight, but instead mixes and matches various offerings from their contractors with customerneeds to create what they call ―multimodal transportation services.‖ They also have a business servicesunit that provides supply-chain analysis and information reporting.Expeditors Internationalof Washington Inc23(NASDAQ: EXPD) provideslogistics services. Their twomain sources of revenue comefrom air freight and oceanfreight services. In both operations, they find the optimal carrier for the cargo based on the customer’sneeds, including time schedules, cost, and destinations. EXPD also operates a customs brokerageservice for goods moving across borders by air, sea, rail, and truck. Operations of their customsbusiness, which account for 41% of the company’s revenue, include arranging inspection, payingimport taxes on behalf of the client, and warehousing and product distribution.21 http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=FDX22 http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=CHRW.O23 http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=EXPD.O 13
  15. 15. Quantitative Analysis Financial Ratios24 Liquidity: Good UPS Liquidity Trend 2005 2006 2007 2008 2009 2010 Current 1.65 1.40 1.20 1.13 1.49 1.95 Ratio Quick Ratio 1.65 1.40 1.20 1.13 1.49 1.95 Cash Ratio 0.47 0.30 0.26 0.13 0.34 0.68 Peers Companies Recent Fiscal Year Comparisons 2010 2009 2009 Peer S&P 2010 FDX CHRW EXPD Average Average UPS Current 1.57 1.79 2.52 1.96 .82 1.95 Ratio Quick Ratio 1.57 1.79 2.52 1.96 .52 1.95 Cash Ratio 0.42 0.46 1.31 0.73 0.68 Liquidity Rankings Current Quick Ratio Cash Ratio Total Ratio UPS 2nd 2nd 2nd 2nd FDX 4th 4th 4th 4th CHRW 3rd 3rd 3rd 3rd EXPD 1st 1st 1st 1st S&P 500 5th 5th - 5thSince the global recession, UPS has seen great improvement in its liquidity ratios. In 2010, liquidity ratios raisedabove its six year highs in 2005. UPS accomplished this despite spending more on its main U.S. hub expansion inthe first half of 2010 and in opening a new intra-Asia hub in Shenzhen, China. UPS achieved this in large part dueto the improving economy which helped volume and revenue trends, as well as the cost containment initiativesand efficiencies implemented over the past few quarters. Also, the new business improvements added to greaterefficiencies in their network and reduced time in transit for shipments in the region. The quick and current ratiosare the same for UPS because they do not have any inventory; they are a services company. 24 Yahoo Finance, Reuters, Annual Reports 14
  16. 16. Asset Management: Good UPS Asset Management Trend 2005 2006 2007 2008 2009 2010 Day Sales in - - - - - - Inventory Average 52.029 47.094 47.467 42.142 44.951 - Collection Period Fixed Asset 2.79 2.83 2.81 2.82 2.52 2.85 Turnover Total Asset 1.22 1.43 1.27 1.62 1.42 1.47 Turnover Peer Companies Recent Fiscal Year Comparisons 2010 2009 2009 Peer S&P 2010 FDX CHRW EXPD Average Average UPS Day Sales in - - - - - - Inventory Average 43.147 42.073 71.289 52.17 47.46 44.95125* Collection Period Fixed Asset 2.41 64.38 8.26 25.02 - 2.85 Turnover Total Asset 1.39 4.13 1.76 2.43 .46 1.47 Turnover Asset Mgmt Rankings ACP FATO TATO Total UPS 3rd 3rd 3rd 2nd FDX 2nd 4th 4th 4th CHRW 1st 1st 1st 1st EXPD 5th 2nd 2nd 3rd S&P 500 4th - 5th 5thFixed Asset Turnover has maintained above 2.5 in the past six years and reached record high levels in 2010.While 2010 FATO is a little bit above the standard for the past 6 years, it shows significant improvement from2009 levels. This is especially important as it is evident that UPS is improving its use of fixed asset investmentsfrom recent expansion asset additions which were supposed to improve business efficiencies. UPS’s uniquebusiness model – all packages go through one integrated network—creates efficient use of assets and hasallowed UPS to maintain high operating margins. While UPS has maintained decent TATO and superior TATOcompared to the S&P average, we believe there is still much room for improvement. As the economy improves,UPS will have better generation of revenues and will increase its operating margins to pre-recession levels.* 2009 ACP figures are used for UPS 15
  17. 17. Debt Management: Below Average UPS Debt Management Trend 2005 2006 2007 2008 2009 2010 Debt Ratio .11 .12 .28 .31 .30 .31 Debt/Equity .24 .27 .90 1.46 1.25 1.30 Ratio Times 35.32 30.85 1.75 11.35 7.56 15.6 Interest Ratio Average 17.843 16.2 13.333 14.485 15.321 - Payment Period Peer Companies Recent Fiscal Year Comparisons 2010 2009 2009 Peer S&P 2010 FDX CHRW EXPD Average Average UPS Debt Ratio .07 .01 - .04 .60 .31 Debt/Equity .12 .01 - .07 1.5 1.3 Ratio Times 23.97 3106 810.61 1313.58 16.28 15.6 Interest Ratio Average 16.738 27.249 53.086 32.357 - 15.321*26 Payment Period Debt Mgmt Rankings Debt D/E TIER APP Total UPS 3rd 3rd 4th 4th 4th FDX 2nd 2nd 3rd 3rd 3rd CHRW 1st 1st 1st 2nd 1st EXPD - - 2nd 1st 2nd S&P 500 4th 4th 5th - 5thUPS fairs poorly compared to its competitors and the market. Debt use has been slowly rising over time incomparison to assets and equity and at levels worse than most of its competitors. There was slight improvementfrom 2008 to 2009, but we believe this is correlated to conservative spending during the economic recession.However, while debt levels rise, UPS is able to cover its interest payments by almost 16 times, almost double theamount from 2009 and a vast improvement from the past three years. By debt levels increasing slightly in 2010,we take this as a sign of advancement and UPS’s increased priority for investment and expansion.* 2009 APP is used for UPS comparisons 16
  18. 18. Profitability: Excellent UPS Profitability Trend 2005 2006 2007 2008 2009 2010Operating 14.43% 13.95% 1.16% 10.45% 8.39% 11.86%MarginNet Profit 9.09% 8.84% 0.77% 5.83% 4.75% 7.04%MarginReturn on 11.07% 12.65% 0.98% 9.42% 6.75% 10.36AssetsReturn on 22.92% 27.14% 3.14% 44.29% 28.20% 43.15%Equity Peer Companies Recent Fiscal Year Comparisons 2010 2009 2009 Peer S&P 2010 FDX CHRW EXPD Average Average UPSOperating 5.75% 7.75% 9.41% 7.64% - 11.86%Profit MarginNet Profit 3.41% 4.76% 5.87% 4.68% 10.9% 7.04%MarginReturn on 4.75% 19.67% 10.34% 11.59% 5.1% 10.36%AssetsReturn on 8.57% 33.41% 15.47% 18.94% 14.2% 43.15%Equity Profitability Rankings OPM NPM ROA ROE Total UPS 1st 2nd 2nd 1st 1st FDX 4th 5th 5th 5th 5th CHRW 3rd 4th 1st 2nd 2nd EXPD 2nd 3rd 3rd 3rd 3rd S&P 500 - 1st 4th 4th 4thProfitability is definitely one of UPS’s strengths. In 2010, margins recovered from recessionary price cutting.UPS’s operating margin power shows superior in comparison to its peers, while it’s ROA and ROE far exceedS&P averages. While there has been margin improvement, they are still below historical six year highs for UPS,showing that there is still room for improvement. As the economy recovers, we see UPS increasing margins as itreceives more volume and more pricing power. 17
  19. 19. Extended DuPont: Excellent UPS DuPont Trend 2005 2006 2007 2008 2009 2010 Net Profit 3.41% 4.76% 5.87% 4.68% 10.9% 7.04% Margin Total Asset 1.22 1.43 1.27 1.62 1.42 1.47 Turnover Equity 2.07 2.15 3.20 4.70 4.18 4.17 Multiplier Return on 22.92% 27.14% 3.14% 44.29% 28.20% 43.15% Equity Peer Companies Recent Fiscal Year Comparisons 2010 2009 2009 Peer S&P 2010 FDX CHRW EXPD Average Average UPS NPM 3.41% 4.76% 5.87% 4.68% 10.9% 7.04% TATO 1.39 4.13 1.76 2.43 .46 1.47 EM 1.80 1.70 1.50 1.67 2.5 4.17 ROE 8.57% 33.41% 15.47% 18.94% 14.2% 43.15% Extended DuPont Rankings NPM TATO EM ROE Total UPS 2nd 3rd 1st 1st 1st FDX 5th 4th 3rd 5th 5th CHRW 4th 1st 4th 2nd 2nd EXPD 3rd 2nd 5th 3rd 4th S&P 500 1st 5th 2nd 4th 3rdWhile UPS’s leverage may be a concern in comparison to its peers, its profitability and ROE to investors is farsuperior. From this model it is evident that ROE is most impacted by the fluctuations in Net Profit Margin andthe Equity Multiplier. As the economy picks up in 2011 and 2012, we expect profit margins to increase as UPSwill have higher pricing capability and see the impact/benefits of cutting costs and improving efficiencies duringthe recession. ROE 50.00% 44.29% 43.15% 40.00% 30.00% 28.20% 27.14% 20.00% 22.92% ROE 10.00% 3.14% 0.00% 2005 2006 2007 2008 2009 2010 18
  20. 20. Financial Ratio Graphs Liquidity Ratios Asset Management 2.50 3.00 2.00 2.50 2.00 1.50 1.50 1.00 1.00 0.50 0.50 0.00 0.00 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 Current Ratio Quick Ratio Cash Ratio Total Asset Turnover Fixed Asset Turnover Debt Management Profitability 160.0% 16.00% 140.0% 14.00% 120.0% 12.00% 100.0% 10.00% 80.0% 8.00% 60.0% 6.00% 40.0% 4.00% 20.0% 2.00% 0.0% 0.00% 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 Debt Ratio Debt/Equity Cash Flow/Debt Operating Margin Net Profit Margin ROA 19
  21. 21. Dividend Growth ModelUPS has consistently paid a very strong dividend relative to its share price meaning that not only wouldthe SMF portfolio benefit from share price appreciation, but also dividend income. Additionally, thegrowth rate of the quarterly dividends has been consistent and has increased by over 2.5% annuallysince 2000. UPS’ significant dividend amount and high yield percentage help to ensure the price of thestock remains relatively high, as a decrease in price would cause the yield to go up, which undernormal circumstances, would cause the stock price to correct itself.Using the dividend growth pricing model and assuming a 6.0% required rate of return for the stock andcontinued dividend growth rate of 2.53% annually, the value of UPS is $75.22. The closeness betweenthe market price and dividend growth model valuation is indicative that this stock is used for dividendincome, meaning it is likely that the robust dividend acts as a price support. 20
  22. 22. Pro Forma Income Statement United Parcels Service, Inc. Consolidated Income Statement (dollars in millions, except per share amounts) 2009 2010 2011 Estimates Growth % Pessimistic Most Likely Optimistic U.S. Domestic Package Growth 1% 3% 6% International Package Growth 7% 10% 14% Supply Chain & Freight Growth 5% 8% 13% Total Revenue Growth 3.05% 5.29% 8.56% Revenue: U.S. Domestic Package $ 28,158 $ 29,742 $ 30,039 $ 30,634 $ 31,527 International Package 9,699 11,133 11,912 12,246 12,692 Supply Chain & Freight 7,440 8,670 9,104 9,364 9,797 Total Revenue 45,297 49,545 51,055 52,244 54,015 Operating expenses: Compensation and benefits 25,640 26,324 26,549 27,167 28,088 Repairs and maintenance 1,075 1,131 1,174 1,202 1,242 Depreciation and amortization 1,747 1,792 1,838 1,881 1,945 Purchased transportation 5,379 6,640 6,076 6,217 6,428 Fuel 2,365 2,972 3,063 3,135 3,241 Other Occupancy 985 939 1,021 1,045 1,080 Other Expenses 4,305 3,873 4,748 4,859 5,023 Total Other Expenses 15,856 17,347 17,920 18,338 18,959 Total operating expenses 41,496 43,671 44,469 45,505 47,047 Operating profit: U.S. Domestic Package 2,138 3,373 3,787 3,875 4,007 International Package 1,367 1,904 2,140 2,190 2,265 Supply Chain & Freight 296 597 659 674 697 Total operating profit 3,801 5,874 6,586 6,739 6,968 Other income (expense): Investment income (loss) 10 3 1 1 1 Interest expense (445) (354) (434) (444) (459) Total other income (expense) (435) (351) (433) (443) (458) Income before income taxes 3,366 5,523 6,153 6,296 6,510 Income tax expense 1,214 2,035 2,154 2,204 2,278 Net income $ 2,152 $ 3,488 $ 4,000 $ 4,093 $ 4,231 Per share amounts Basic earnings per share $ 2.16 $ 3.51 $ 4.02 $ 4.12 $ 4.26 Diluted earnings per share $ 2.14 $ 3.48 $ 3.99 $ 4.08 $ 4.22 21
  23. 23. 2011 Pro Forma Income Statement AssumptionsRevenues: In order to forecast revenue growth for 2011, we broke UPS’s revenues down into the three mainoperating segments, U.S. Domestic Package, International Package, and Supply Chain and Freight, andforecasted the growth of each segment separately.U.S. Domestic Package: For the U.S. Domestic Package segment, we made a growth matrix from the revenuesspanning back to 2005. The growth matrix is displayed in the Appendix, page 31. Based off of the growthmatrix, we assigned growth rates of 1%, 3%, and 5% to our pessimistic, most likely, and optimistic casesrespectively. The pessimistic growth rate of 1% is slightly higher than the median growth rate of .78%. Mostlikely is set at 3% to mimic the U.S. economic growth. The optimistic growth rate of 5% is set slightly below thegrowth rate from 2009 to 2010, which was 5.63%.International Package: For the International Package segment, we made a growth matrix from the revenuesspanning back to 2005. The growth matrix is displayed in the Appendix, page 31. Based off of the growthmatrix, we assigned growth rates of 7%, 10%, and 14% to our pessimistic, most likely, and optimistic casesrespectively. The pessimistic growth rate of 7% is set slightly higher than the 6.89% median growth rate. Mostlikely is set at 10% which is slightly lower than the growth rate from the years 2005 to 2008, which we believemore accurately represent UPS’s growth opportunities. The optimistic growth rate of 14% is set slightly belowthe 14.79% growth rate from 2009 to 2010.Supply Chain and Freight: For the Supply Chain and Freight segment, we made a growth matrix from therevenues spanning back to 2005. The growth matrix is displayed in the Appendix, page 31. Based off of thegrowth matrix, we assigned growth rates of 5%, 8%, and 13% to our pessimistic, most likely, and optimisticcases respectively. The pessimistic growth rate was set at 5% which is slightly lower than the median of 5.55%.Most likely was set at 8% which is half of the growth rate from 2009 to 2010. Optimistic is once again set belowthe growth rate from 2009 to 2010, which was 16.53%.Total Growth Rate: The total revenue growth rates are 3.05%, 5.29%, and 8.56% for our pessimistic, most likely,and optimistic cases respectively.Total Operating Expenses: Total operating expenses were set at 89.1% of revenue. Of the 89.1%, 52% isattributed to Compensation and benefits. The other 35.1% is attributed to other expenses. Of the other expenses,purchased transportation is the largest taking up 11.9% of the allotted 89.1% of revenue.Total Operating Profits: Total operating profits are broken down as follows: U.S. Domestic Package is 57.5%of total operating Profits, International Package is 32.5% of total profits, and Supply Chain and Freight is 10% oftotal profits.Income Tax Expense: Income Tax Expense was set at 35% of EBIT based on Valueline estimates.Shares Outstanding: Shares outstanding was set at the current amount of shares outstanding to be conservativebecause there is no guarantee that UPS will buy back shares.P/E Valuation Historical P/E Multiples 2002 2003 2004 2005 2006 2007 2008 2009 Average UPS 28.5 25.9 26.1 21.1 19.8 17.8 18.4 22.6 22.5 FDX 19.7 19.3 19.6 18.5 16.3 16.5 17 17.5 18.1 CHRW 27.4 27 28.1 26 29.2 27.2 25.9 24.6 26.9 EXPD 28.6 31.7 32.9 32 41.5 36.9 28.7 28.7 32.6 Averge 26.05 25.975 26.675 24.4 26.7 24.6 22.5 23.35 25.0 22
  24. 24. Historic P/E Multiple: Above is a table with the historic P/E multiples for UPS and its peer competitors. UPShas had a higher P/E multiple than FDX, its main competitor, for the last 8 years. However, it has had lower P/Emultiples than the other two peers, CHRW and EXPD. From 2002 to 2007 the P/E multiple for UPS hasdeclined, but has started in increase since 2008. We believe this trend will continue and the P/E Multiple willcontinue to increase slightly in the years to come. Historical P/E Multiples 45 40 35 30 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 UPS FDX CHRW EXPD AvergeAbove is a graph of UPS and its competitors’ P/E multiples dating back to 2002. P/E Valuation Pessimistic Most Likely Optimistic EPS $ 3.99 $ 4.08 $ 4.22 P/E Multiple 18.5 21.5 23.5 Price Per Share $ 73.77 $ 87.73 $ 99.14 Probability 0.15 0.7 0.15 Weighted Average Price $ 87.35 Current Price $ 76.47 Margin of Safety 14%P/E Valuation: P/E multiples were set at 18, 21.5, and 23.5 for our pessimistic, most likely, and optimisticscenarios respectively. The pessimistic multiple was set at 18.5 which is about equal to the P/E multiple in 2008.We put a multiple of 21.5 as the most likely which is below the 2009 multiple and also below the average. Foroptimistic we placed the multiple at 23.5 based on UPS having higher multiples prior to 2005. 23
  25. 25. P/S ValuationHistorical P/S Multiples 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 AverageUPS 2.65 3.1 2.75 2.5 2 1.65 1.6 1.5 1.4 1.4 2.1Historic P/S Multiples:We could not locate P/S multiples for the UPS’s peer competitors. Above is atable of historic P/S multiples for UPS since 2001. UPS 3.5 3 3.1 2.65 2.75 2.5 2.5 2 2 1.65 1.6 1.5 1.5 1.4 1.4 UPS 1 0.5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Above is a graph of the P/S multiples for UPS. There has been a trend down in the last eight years, butthe trend seems to be leveling out. P/S Valuation 2011 Pessimistic Most Likely Optimistic Revenue $ 51,055 $ 52,244 $ 54,015 Shares Outstanding 1003 1003 1003 Sales Per Share $ 50.90 $ 52.09 $ 53.85 P/S Multiple 1.3 1.6 2.2 Price Per Share $ 66.17 $ 83.34 $ 118.48 Probability 0.15 0.7 0.15 Weighted Average $ 86.04 Current Price $ 76.47 Margin of Safety 13%P/S Valuation: For our P/S valuation, we divided our 2011 pro forma revenues for each scenario bythe number of current shares outstanding (Both revenue and Shares outstanding are in millions). Wethen multiplied the sales per share by a corresponding P/S multiple. For pessimistic we placed themultiple at 1.3 if the trend continues downward. Most likely we placed a 1.6 multiple which would be aslight increase from the 2010 multiple. For optimistic, we placed the multiple at 2.2, which is slightlyabove the average multiple over the last ten years. 24
  26. 26. EV/EBITDA ValuationHistorical EV/EBITDA Multiples 2002 2003 2004 2005 2006 2007 2008 2009 2010 AverageUPS 13 14.5 14 12.5 10 9.5 26 14 11 13.8Historic EV/EBITDA Multiples: Above are historic EV/EBITDA multiples for UPS. We were unableto find EV/EBITDA multiples for their peer competitors. Historical EV/EBITDA Multiples 30 25 26 20 15 14.5 13 14 14 12.5 UPS 10 10 11 9.5 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010Above is a graph of the historical EV/EBITDA multiples from 2002 to 2010. There was a significantspike in the EV/EBITDA multiple in 2008. This can be attributed to lag of the low EBITDA of 2007. EV / EBITDA Valuation Pessimistic Most Likely OptimisticEBIT 6,586,000,000 6,739,000,000 6,968,000,000D&A 1,838,000,000 1,881,000,000 1,945,000,000EBITDA 8,424,000,000 8,620,000,000 8,913,000,000EV / EBITDA Multiple 9.00 11.00 13.00Enterprise Value 75,816,000,000 94,820,000,000 115,869,000,000Cash 4,081,000,000 4,081,000,000 4,081,000,000Debt 10,491,000,000 10,491,000,000 10,491,000,000Market Cap 69,406,000,000 88,410,000,000 109,459,000,000Shares Outstanding 1,003,000,000 1,003,000,000 1,003,000,000Price Per Share $ 73.40 $ 88.15 $ 109.13Probability 0.15 0.7 0.15Weighted Average Price $ 89.08Current Price $ 76.47Margin of Safety 16.5% 25
  27. 27. EV/EBITDA Valuation: For our EV/EBITDA, we started with our projected operating profit from eachscenario from our 2011 pro forma income statement. We then added the depreciation and amortization to arriveat the EBITDA value. The depreciation was combined in UPS income statement with amortization under theOther Expenses category. We then multiplied the EBITDA by the EV/EBITDA multiple to arrive at theenterprise value. EV/EBITDA multiples were 9, 11, and 13 for our pessimistic, most likely, and optimisticrespectively. Our pessimistic multiple of 9.5 is the lowest multiple for UPS in the last 9 year. Our most likelywas set at 11 which was the EV/EBITDA multiple for 2010. Our optimistic was set at 13 which is slightly belowthe average multiple over the past eight years. For the price per share, we added cash back to the enterprisevalue. We then divided that number by the number of shares outstanding to arrive at out price per share.DCF ValuationFree Cash Flow Calculation Actual Estimated 2008 2009 2010 2011 2012 2013 2014 2015Revenue Growth -12.02% 9.38% 5.45% 5.29% 5.29% 5.29% 5.29%Revenue 51,486 45,297 49,545 52,244 55,008 57,918 60,982 64,208EBIT Margin 9.74% 7.43% 11.15% 12.05% 12.05% 12.05% 12.05% 12.05%EBIT 5,015 3,366 5,523 6296 6,628 6,979 7,348 7,737Taxes 2,012 1,214 2,035 2,204 2,320 2,408 2,535 2,669NOPAT 3,003 2,152 3,488 4,093 4,308 4,571 4,813 5,068Plus: D&A 1,814 1,747 1,792 1881 2,019 2,126 2,238 2,356Less: Cap Ex 2,636 1,602 1,389 1567 1650 1738 1829 1926Less: Change 1,130 194 1,090 1,149 1,210 1,274 1,342 1,413NWCFCFF 1,051 2,103 2,801 3,257 3,467 3,685 3,880 4,085Free Cash Flow Assumptions:Revenue: We based revenue growth off of the Pro Forma Income Statement along with considerationfrom the growth matrixes found in the appendix. Growth for 2011 is 5.45% and decreases to 5.29% forthe years 2012 to 2015.EBIT: We based our EBIT off of historical EBIT margins. There has been a trend up in the margin andUPS is expected to continue to improve their EBIT margin in the years to come.Tax Rate: We set the tax rate at 35% of EBIT for the years 2011 and 2012. For the years 2013 to 2015we lowered the tax rate to 34.5% of EBIT because the increase in international sales should effectivelylower the tax rate for UPS.Depreciation and Amortization: For our forecast of depreciation and amortization for 2011 to 2015, welooked at the expenses as a percent of revenue. We used the historical average of 3.67% to forecast ourestimates.Capital Expenditures: We looked at historical capital expenditures on the Cash Flow Statement andthen set them up as a percentage of revenue. We used a historical average of 3% of revenue. 26
  28. 28. Net Working Capital: We looked at historical net working capital expenditures on the Cash FlowStatement and then set them up as a percentage of revenue. We used a historical average of 2.2% ofrevenue. Discounted Cash Flows 2011 2012 2013 2014 2015 Terminal Value FCFF $ 3,257 $ 3,467 $ 3,685 $ 3,880 $ 4,085 $ 136,179 WACC 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% PV of CF $ 3,009 $ 2,959 $ 2,905 $ 2,826 $ 2,748 $ 91,616 Number of Periods 1 2 3 4 5 5Discounted Cash Flow Assumptions:WACC:WACC = (% Debt)(Cost of Debt)(1-T) + (% Equity)(Cost of Equity)WACC = (28.6%)(4.77%)(65%)+(71.4%)(10.71%)WACC = (8.25%)Terminal Value: In Order to forecast terminal value for UPS, we used a 3% estimate for our expected steadygrowth rate of UPS’s FCFF in perpetuity. Spreadsheet DCF Valuation PV of CFs 14,447 PV of TV 91,616 Enterprise Value 106,063 Debt 10,491 Cash 4,081 Market Cap 91,491 Shares Outstanding 1,003 Price Per Share $ 91.22 Current Price $ 76.47 Margin of Safety 19%Spreadsheet DCF Valuation: For our spreadsheet DCF valuation we added together the total present values ofeach of the yearly forecasts along with the terminal value estimate to arrive at an enterprise value. We thensubtracted debt and cash to arrive at market cap. We then divided the market cap by shares outstanding to arriveat an estimated price per share of $91.22. 27
  29. 29. Price Target Price Target P/E P/S EV/EBITDA DCF Valuation Price $ 87.35 $ 86.04 $ 89.09 $ 91.22 Weight 25% 25% 25% 25% Weighted Value Price $ 88.43 Current Price $ 76.47 Margin of Safety 16%Target Price: For our target price, we weighted each valuation equally at 25%. We arrived at a weightedvaluation price of $88.43, which gives us a margin of safety of 16%.ConclusionWe recommend buying 900 shares of UPS at an approximate NAV of $68,814  We believe UPS has high potential in fragmented emerging markets like China, as evident by its recent expansions in 2010 and its purchase of seven new airplanes in 2011. Air freight transportation is growing here.  UPS has high operating margins and will gain even higher profits as the economy recovers and they have higher pricing power in 2011 and 2012. Management has even forcasted 2011 earnings to exceed peek levels in 2007.  UPS is growing its Supply Chain and Freight division, using customizable logistics solutions. While they are already utilized for many retail and high tech companies, they are branching out into global healthcare distribution market We believe there is high growth potential for this segment. In January, UPS announced UPS Healthcare facilities expansion in Kentucky, Singapore, Netherlands, and in Canada.  UPS operates in a dupology competitive environment, with their only direct competitor being FedEx. Past performance has shown they are able to set prices on rates as well as pass along higher costs of doing business, such as energy price increases.  Thec ompany’s financial strength has allowed them to generate consistent cash flows across all their business segments and produce a 6-year average ROE of 28%.  2011 EPS is projected to reach an all-time high. 28
  30. 30. APPENDIXFinancial Statements UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions) December 31, 2009 2008 ASSETSCurrent Assets: Cash and cash equivalents $ 1,542 $ 507 Marketable securities 558 542 Accounts receivable, net 5,369 5,547 Finance receivables, net 287 480 Deferred income tax assets 585 494 Income taxes receivable 266 167 Other current assets 668 1,108 Total Current Assets 9,275 8,845Property, Plant and Equipment, Net 17,979 18,265Goodwill 2,089 1,986Intangible Assets, Net 596 511Non-Current Finance Receivables, Net 337 476Other Non-Current Assets 1,607 1,796Total Assets $31,883 $31,879 LIABILITIES AND SHAREOWNERS’ EQUITYCurrent Liabilities: Current maturities of long-term debt and commercial paper $ 853 $ 2,074 Accounts payable 1,766 1,855 Accrued wages and withholdings 1,416 1,436 Self-insurance reserves 757 732 Income taxes accrued 258 37 Other current liabilities 1,189 1,683 Total Current Liabilities 6,239 7,817Long-Term Debt 8,668 7,797Pension and Postretirement Benefit Obligations 5,457 6,323Deferred Income Tax Liabilities 1,293 588Self-Insurance Reserves 1,732 1,710Other Non-Current Liabilities 798 864Shareowners’ Equity: Class A common stock (285 and 314 shares issued in 2009 and 2008) 3 3 Class B common stock (711 and 684 shares issued in 2009 and 2008) 7 7 Additional paid-in capital 2 — Retained earnings 12,745 12,412 Accumulated other comprehensive loss (5,127) (5,642) Deferred compensation obligations 108 121 Less: Treasury stock (2 shares in 2009 and 2008) (108) (121) Total Equity for Controlling Interests 7,630 6,780 Noncontrolling Interests 66 —Total Shareowners’ Equity 7,696 6,780Total Liabilities and Shareowners’ Equity $31,883 $31,879 29
  31. 31. UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (In millions, except per share amounts) Years Ended December 31, 2009 2008 2007Revenue $45,297 $51,486 $49,692Operating Expenses: Compensation and benefits 25,640 26,063 31,745 Repairs and maintenance 1,075 1,194 1,157 Depreciation and amortization 1,747 1,814 1,745 Purchased transportation 5,379 6,550 5,902 Fuel 2,365 4,134 2,974 Other occupancy 985 1,027 958 Other expenses 4,305 5,322 4,633Total Operating Expenses 41,496 46,104 49,114Operating Profit 3,801 5,382 578Other Income and (Expense): Investment income 10 75 99 Interest expense (445) (442) (246)Total Other Income and (Expense) (435) (367) (147)Income Before Income Taxes 3,366 5,015 431Income Tax Expense 1,214 2,012 49Net Income $ 2,152 $ 3,003 $ 382Basic Earnings Per Share $ 2.16 $ 2.96 $ 0.36Diluted Earnings Per Share $ 2.14 $ 2.94 $ 0.36 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (In millions) Years Ended December 31, 2009 2008 2007Cash Flows From Operating Activities: Net income $ 2,152 $ 3,003 $ 382 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,747 1,814 1,745 Pension and postretirement benefit expense 872 726 513 Pension and postretirement benefit contributions (924) (246) (687) Self-insurance reserves 47 87 69 Deferred taxes, credits and other 471 187 (249) Stock compensation expense 430 516 447 Asset impairment charges 181 575 221 Other (gains) losses 115 634 243 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (30) 197 (380) Income taxes receivable 27 1,161 (1,191) Other current assets 136 (144) (3) Accounts payable (107) 87 (37) Accrued wages and withholdings (102) 44 108 Other current liabilities 184 (184) 56 Other operating activities 86 (31) (114) Net cash from operating activities 5,285 8,426 1,123Cash Flows From Investing Activities: Capital expenditures (1,602) (2,636) (2,820) Proceeds from disposals of property, plant and equipment 60 147 85 Purchases of marketable securities (2,251) (3,391) (9,017) Sales and maturities of marketable securities 2,240 3,113 9,638 30
  32. 32. Net (increase) decrease in finance receivables 261 (49) (39) Other investing activities 44 (363) (46) Net cash (used in) investing activities (1,248) (3,179) (2,199)Cash Flows From Financing Activities: Net change in short-term debt (1,738) (2,016) 2,613 Proceeds from long-term borrowings 3,160 3,613 4,094 Repayments of long-term borrowings (1,944) (2,518) (198) Purchases of common stock (561) (3,570) (2,639) Issuances of common stock 149 169 174 Dividends (1,751) (2,219) (1,703) Other financing activities (360) (161) (44) Net cash provided by (used in) financing activities (3,045) (6,702) 2,297Effect Of Exchange Rate Changes On Cash And Cash Equivalents 43 (65) 12Net Increase (Decrease) In Cash And Cash Equivalents 1,035 (1,520) 1,233Cash And Cash Equivalents: Beginning of period 507 2,027 794 End of period $ 1,542 $ 507 $ 2,027Cash Paid During The Period For: Interest (net of amount capitalized) $ 390 $ 359 $ 248 Income taxes $ 443 $ 760 $ 1,351Growth Matrixes 2005 2006 2007 2008 2009 2010 Total Revenue 42,581 47,547 49,692 51,486 45,297 49,545 2006 2007 2008 2009 2010 2005 11.66% 8.03% 6.53% 1.56% 3.08% 2006 4.51% 4.06% -1.60% 1.03% 2007 3.61% -4.52% -0.10% 2008 -12.02% -1.90% 2009 9.38% Median 3.08% Mean 2.22% 2005 2006 2007 2008 2009 2010 U.S. Domestic Package Revenue 28,610 30,456 30,985 31,278 28,158 29,742 2006 2007 2008 2009 2010 2005 6.45% 4.07% 3.02% -0.40% 0.78% 2006 1.74% 1.34% -2.58% -0.59% 2007 0.95% -4.67% -1.36% 2008 -9.98% -2.49% 2009 5.63% 31

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