2. Agenda
Thesis and Recommendations
Analysis
Industry
Segments and Pricing
Productivity and Cost Risks
Capital Structure
Conclusion
2
3. Thesis and Recommendations
Thesis
UPS is a much better managed company
FedEx needs to improve operations in
order to stay competitive
Recommendations for FedEx
Use financial derivatives as hedge instruments
Optimization in package routing through technology
Increase transport efficiency and effectiveness by modernizing aging fleet
Replace aging air fleet to reduce operating expenses
Replace operating leases with capital lease to improve operating margin
Focus on growing high margin international business segment through Priority Service
3
4. Industry Analysis
Five force analysis
Customers bargaining power(A): HIGH
Suppliers bargaining power(B): MEDIUM - HIGH
Threats of new entrant(C): LOW
(B)
Power of substitutes(D): LOW (Depends)
Industry rivalry(E): HIGH
(A) (C)
(D)
(E) 4
5. Segments & Pricing
Int’l • Asia Pacific – largest growing
region, 24% in 2010
&
• US Market near saturation
Domestic • High demand for int’l priority
Comp. Adv.
Express $56
Domestic High Margin
$37 Prices
Delivery
Ground $16
$19
$7 $7 $8 $7
Low Margin
Domestic
International
International
Domestic US
Domestic
Ground
domestic
Freight
priority
Air
Truck & LTL Loss
FedEx
UPS
Recommendation:
• Focus on growing high margin international business segment through Priority Service
5
6. Productivity and Costs Risks
Cost Breakdown Structure
Salary and employee benefits Purchased transportation Rentals and leases
Depreciation and amortization Fuel Expenses Maintenance and repairs
Other Expenses Operating margin
3.6%
UPS 53.1% 13.4% 1.9% 6.0% 2.3% 7.8% 11.9%
FedEx 38.9% 14.4% 6.3% 5.0% 10.6% 5.0% 13.8% 6.10%
While FedEx has achieved lower relative expense for # of Revenue Op. Inc. /
salary and employee benefits – it has exposed itself Emp. / Emp. Emp.
to risk with its leases, fuel
FedEx 290,000 $135,500 $8,200
expense, maintenance, and repairs
UPS 400,600 $132,563 $15,177
Recommendations:
• Use financial derivatives as hedge instruments (short-term) and optimization in package routing
through technology (long-term).
• Increase transport efficiency and effectiveness by modernizing aging fleet
6
7. Capital Structure - Profitability
FedEx UPS
ROE 9.5% ROE 43.3%
ROA 5.6% Benefit from Lev 3.9% ROA 14.3% Benefit from Lev 29.1%
Asset Profit ROA- Asset Profit ROA-
Turn Margin Interest Liab/SE Turn Margin Interest Liab/SE
1.5 3.7% 2.3% 1.69 2.0 7.0% 9.6% 3.04
Capital Structure
100%
Lower ROE of FedEx appears to be caused by lower
leverage and thin profit margin
80%
60%
40%
20%
0%
Fedex UPS
Share Holders Equity Long Term Debt Current Liabs
7
9. Capital Structure – with Off Balance Sheet Items
Capital Structure as Reported Capital Structure w/Off Balance Sheet
Items
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
Fedex UPS Fedex UPS
Share Holders Equity Off Balance Sheet Items
Share Holders Equity Long Term Debt Current Liabs
Long Term Debt Current Liab
FedEx has more liabilities than UPS, which comprise majority Operating Leases
9
10. Adjusted Capital Structure –Profitability
FedEx UPS
ROE 9.5% ROE 43.3%
ROA 3.2% Benefit from Lev 6.3% ROA 12.1% Benefit from Lev 31.2%
Asset Profit ROA- Asset Profit ROA-
Turn Margin Interest Liab/SE Turn Margin Interest Liab/SE
0.9 3.7% 2.1% 2.99 1.7 7.0% 8.7% 3.57
200 Cap.Ex. per $ of Operating Cash Flow
Air Fleet Age
1.00
150
No.of Aircrafts
0.80
Capex / OCF
100 0.60
0.40
50
0.20
0 0.00
2004
2005
2006
2007
2008
2009
2010
2011
10 20 30 40 50
Age (Years)
FedEx UPS FedEx UPS
Recommendations:
• Replace aging air fleet to reduce operating expenses
• Replace operating leases with capital lease to improve operating margin
10
11. Conclusion
UPS
More efficient
Superior financial performance
Greater shareholder returns
FedEx
Grow high-margin int’l business segment through Priority Service
Hedge fuel expenses through financial products
Reduce costs and increase profit by modernizing aging air fleet
Improve package delivery performance by investing in technology
11
13. Exhibit A: Summary & Growth
FedEx UPS
Average Daily Packages 6.9 million 15.8 million
Express Packages Delivered On Time 88% 91%
Average Express Transit Time 17:21 17:57
Total Air Fleet 694 Jets 268 Jets
Ground Fleet 43000 Ground Vehicles 101900 Ground Vehicles
Alternative Fuel 406 2,022
Hybrid Vehicles 329 (and 19 Electric Vehicles) 250
Change year-to-year 2011 2010 2009 FedEx (4 yearavg.) UPS (4 yearavg.)
In average fuel price 22.3% -14.7% -6.8% Sustainable Growth* 3.8% -4.5%
In FedEx fuel cost as % of revenues 1.7% -1.6% -1.1% Actual Growth** 3.1% 2.0%
In UPS fuel cost as % of revenues 1.2% -0.5% -0.2%
13
14. Exhibit B: DuPont Comparison
FedEx Profitability UPS Profitability
ROE 9.5% ROE 43.3%
ROA 5.6% Benefit from Lev 3.9% ROA 14.3% Benefit from Lev 29.1%
Asset Profit ROA- Asset Profit ROA-
Turn Margin Interest Liab/SE Turn Margin Interest Liab/SE
1.5 3.7% 2.3% 1.69 2.0 7.0% 9.6% 3.04
FedEx Profitability after adjustments UPS Profitability after adjustments
ROE 9.5% ROE 43.3%
ROA 3.2% Benefit from Lev 6.3% ROA 12.1% Benefit from Lev 31.2%
Asset Profit ROA- Asset Profit ROA-
Turn Margin Interest Liab/SE Turn Margin Interest Liab/SE
0.9 3.7% 2.1% 2.99 1.7 7.0% 8.7% 3.57
14
15. Exhibit C: Growth Model
05/31/2011 05/31/2010 05/31/2009 05/31/2008 05/31/2007
Inflation 0.03% 2.63% 1.63% 2.93% 4.30%
FedEX
Report Date 05/31/2011 05/31/2010 05/31/2009 05/31/2008 05/31/2007
Scale Millions Millions Millions Millions Millions
Total Revenue 39,304 34,734 35,497 37,953 35,214
Retained Earnings (for that year) 1300 1047 -83 1032 1902
Total Equity 15,220 13,811 13,626 14,526 12,656
FedEx 05/31/2011 05/31/2010 05/31/2009 05/31/2008 05/31/2007 Average
Sustainable Growth Rate 8.5% 5.0% -2.2% 4.2% 10.7% 3.8%
Actual Growth Rate 13.16% -2.15% -6.47% 7.78% 3.1%
UPS
Report Date 05/31/2011 05/31/2010 05/31/2009 05/31/2008 05/31/2007
Scale Millions Millions Millions Millions Millions
Total Revenue 53,105 49,545 45,297 51,486 49,692
Retained Earnings -476 1419 333 -1774 -3490
Total Equity 7,035 7,979 7,630 6,780 12,183
UPS 05/31/2011 05/31/2010 05/31/2009 05/31/2008 05/31/2007 Average
Sustainable Growth Rate -6.8% 15.2% 2.7% -29.1% -32.9% -4.5%
Actual Growth Rate 7.19% 9.38% -12.02% 3.61% 2.0%
15
Notes de l'éditeur
Good evening everyone!We are the FedEx vs UPS team.
A quick overview of what we would be talking about in the next 20mins.Our analysis has been primarily around the key questions of –First - Where is FedEx or UPS making money, and we dig deeper into each of the business segments and their pricing strategies.Second - Where is the money coming from and where is it going, particularly an in-depth analysis of the capital structure for both the firms.And third - With each company’s core competencies and capabilities, how they are meeting customer requirements and what are the possible risks associated, specific to employee productivity and costs?
Package delivery is a commoditized and a price-competitive industry. But, where FedEx and UPS, have some similarities (which is expected), there are some pretty interesting strategic differences.It basically boils down to analyzing what these companies say they are doing and what they are actually doing!We found that UPS is a much better managed of the two- -operating at almost two times the EBITDA margins-generating higher returns on assets-and creating significantly more shareholder value.Although FedEx is by no means unprofitable, boasting an impressive 3.1% annualized and 11.6% five-year CAGR revenue growth rates in a commoditized industry, we find that there are opportunities for improvement and growth that the firm can purse. In this presentation we will discuss the corporate strategies that FedEx can implement in order to stay competitive. Our recommendations focus on three key drivers--growing market share-increase efficiency-generating more shareholder value, through the following strategies:-Use financial derivatives as hedge instruments, to manage fuel costs.-Optimization in package routing through technology -Increase transport efficiency and effectiveness by modernizing aging fleet-Replace aging air fleet to reduce operating expenses-Replace operating leases with capital lease to improve operating margin-Focus on growing high margin international business segment through Priority Service
In a commodity market,little product differentiation and consumer behavior is driven primarily by prices => FedEx is at a disadvantage.FedEx’s higher prices result from its inability to efficiently manage costs and having sub-optimized delivery network when compared to UPS. FedEx is also suffering from margins that are almost half as those of UPS, and therefore it cannot decrease prices any further without creating a significant impact on its profitability.FedEx’s strength in international delivery allows the company to receive much higher margins in that segment, and also experience faster growth than its rivals. FedEx’s capability in order fulfillment for international priority package delivery is its differentiating factor in the market and we recommend that the company leverage this strength to grow its international presence. As a matter of fact,over the last four years Internationalwasresponsible for majority of FedEx revenue. In 2011 International segments contributed 40% of FedEx Express revenue and in 2010 it was the only segment that grew.While US package delivery market becomes saturated with lower margins and more competition, the international market is growing faster than ever. We believe FedEx can leverage its strengths to capitalize on this growing demand and become an international market leader in package delivery service, while leaving UPS to remain the leader in US.
Cross-functional analysis-Operating in a highly commoditized industry, both FedEx and UPS have similarities as well as differences in how they conduct their business. Both have similar core competencies in order fulfillment-and core capabilities in Operations and Technology. -Workforce is one of the points of difference between the two, with UPS going the union way (Red Circle), while FedEx hires more contractors. -But one of the biggest difference is the way FedEx and UPS finances their business is significantly different. UPS is highly leveraged, which makes ROE and related ratios much higher than those of FedEx. -UPS’s operations are much better structured as compared to that of FedEx which is clearly reflected by its operational margins. “Click”In summary, we conclude that UPS is currently a better managed company, -enjoying superior financial performance -and greater shareholder returns. And while FedEx has made strides to improve its operations over the past few years,in order to stay competitive it must continue to invest in expanding its services, increase operational efficiency, upgrade the fleet, and invest in technology. Based on our analysis we recommend FedEx take four initiatives to improve its business: -grow its high-margin international business segment through Priority Service, -hedge fuel expenses through financial products, -reduce costs and increase profit by modernizing aging air fleet, -and improve freight segment performance by investing in technology.
Thank you for listening to us. We are now open for questions!
