- FedEx was founded in 1971 by Fred Smith with $4 million in capital raised to provide transportation services. UPS was founded in 1907 and provides logistics services including transportation, distribution, and freight. - Both companies have grown significantly over the years through acquisitions and international expansion. By 2009, FedEx reported $35 billion in revenues and UPS reported $45 billion in revenues. - Financial projections were made for FedEx and UPS from 2012-2017 based on assumptions about growth rates, costs, tax rates, and capital structure to calculate free cash flows and enterprise values for valuation. The estimated intrinsic share values were above current market prices.

2. 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.
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3. 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.
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4. 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)5
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5. 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 prices
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6. 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 rates
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7. 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 Turkey
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8. 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 sales
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9. 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 2012
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10. 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
2011
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11. 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
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12. 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%
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13. 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%
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14. 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 yield
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15. 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 $52.99
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16. Questions?