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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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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