In 2004, the U. S. and China agreed to increase their air transportation flights, which delivered their goods between one another. This agreement represented the most dramatic liberalization of air traffic in the history of the two nations, and therefore FedEx Corporation and United Parcel Service, Inc. (UPS), the only domestic cargo carriers who were permitted to serve the Chinese market at the time were locked in to being the primary beneficiaries of this opportunity. The stock prices for both companies had rose on steady basis since these talks originally began, but FedEx share price skyrocketed five times the rate UPS has.
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Exhibit 1 below shows UPS and FedEx Stock price patterns from June 2003 to June 2004 relative to the S&P 500 Index. During this time FedEx had the largest foreign presence in China, with 11 weekly flights almost twice as many as UPS. FedEx volumes have grown by more than 50% between 2003 and 2004. Although UPS fell behind FedEx in the Chinese market, it was still the world’s largest package-delivering company and the dominant parcel carrier in the United States. As the U. S. package delivery industry prospered, the international markets and especially China became a battleground for the two package delivery giants.
FedEx had eventually developed customer logistical management, and was widely looked upon as innovative, entrepreneurial, and an operational leader. On the other hand UPS was repositioning itself as a leading provider of logistics and supply chain management services. FedEx Corporation FedEx first took form as an undergraduate named Fred Smith developed a term paper for his Yale University economics class. Smith’s strategy proposed that FedEx would purchase the planes that it required to transport packages, where all other competition at the time used cargo space that was available on passenger airlines.
On top of using his own purchased planes, Smith’s key innovation was a hub-and-spoke distribution pattern, which allowed cheaper and faster service to more locations than his competitors could offer. In 1971, Fred Smith invested his $4 million inheritance, and raised $91 million in venture capital to launch the
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firm, which in return became the largest venture capital start up at the time. Initially FedEx, then known as Federal Express Corporation, experienced severe losses, and Smith was nearly let go from his chair position. By 1976, FedEx finally saw a profit of $3.6 million on an average daily volume of 19,000 packages. Through the rest of the 1970’s, FedEx continued to expand services, acquiring more trucks and aircraft, raising capital along the way. The formula proved to be successful, and in 1981, FedEx generated more revenue than any other U. S. air delivery company. During the 1990’s FedEx proved to be an operational leader, receiving the prestigious Malcolm Baldrige National Quality award from the President of the United States. They were the first company to ever win in the service category.
Most of this success came from the deregulation and the operation strategy, but credit also must be given to FedEx’s philosophy of “People-Service-Profit”, which reflected its emphasis on customer focus, total quality management, and employee participation. FedEx can acknowledge that their growth came from the context of fundamental change in the business environment. The deregulation of the domestic airline industry permitted larger planes to replace smaller ones, which allowed FedEx to purchase several Boeings’ 727, which helped reduce its unit costs.
The trucking deregulation also allowed FedEx to establish an integrated regional trucking system that lowered its unit costs on short haul trips, which enabled the company to compete more effectively with UPS. With the rising inflation costs and global competition manufacturers were compelled to manage inventories more closely and emulate the (JIT) Just-in-Time supply programs of the Japanese, which created an increased demand for FedEx’s rapid and careful monitoring of their movements of packages.
By year’s end of 2003, FedEx nearly had $15. 4 billion in assets and a net income of $830 million on revenues of about $22. 5 billion. United Parcel Service, Inc. United Parcel Service, Inc. also known as UPS was founded in 1907. It was the largest package delivery service company in the world. Consolidating parcel deliveries, both on ground and in the air, was UPS primary business focus of the company. In the industry UPS was known as “Big Brown” with its roots stemming from Seattle, Washington.
Jim Casey at 19 years of age started a bicycle-messenger service called the American Messenger Company, but after merging with rival firm, Motorcycle Delivery Company in 1929, United Parcel Service of America (UPS) was formed. UPS started an air delivery service by putting packages on commercial passenger planes. The company entered its strongest period of growth during the post-World War II economic boom, and by 1975 UPS reached a milestone where it could promise package delivery to every address in the entire U. S.
In that same year UPS expanded outside of the country with their first delivery to Ontario, Canada. Following that year UPS trademarked 120 brown delivery vans and began service in West Germany. The key to UPS’s success was their “efficiency”. According to Business Week “Every route is timed down to the traffic light. Each vehicle was engineered to exacting specifications, and the drivers endure a daily routine calibrated down to the minute”. UPS had their share of bad times with several major strikes resulting from changes in their labor practices and driver requirements.
In the middle of 1997, 190,000 teamsters employed at UPS went on strike for 15 days before agreeing to a 5 years contract. The agreement increased wages and also added 10,000 new full-time jobs and promoting 10,000 part-time workers into full time positions. The strike was relevant because it cost UPS $700 million in lost revenue, resulting in less than 1% sales growth for 1996 and a decline in profits to $909 million from %1. 15 billion. For most of the companies’ existence, UPS stock was owned primarily by UPS’s managers, their families, former employees, or charitable foundations owned by UPS.
The company would buy and sell shares at fair market value determined by the board of directors each quarter, but by the end of the 90’s having to deal with the big losses from the strike the company needed to add flexibility by traded their stocks publicly in order to pursue a more aggressive acquisition strategy. In November 1999, UPS initiated a two-for-one stock split; where the company exchanged each existing UPS share for two Class A shares. UPS was able to sell 109. 4 million newly created class B shares on the NYSE in an IPO that raised $5. 266 billion, net of issuance costs.
UPS used the bulk of these proceeds to repurchase 68 million shares of the Class A stock. Class A shares were convertible to Class B shares, and could be traded or sold accordingly. Even though both shares of stock had the same economic interest in the company, Class A shares entitled holders to “ten” votes per share whereas Class B shareholders were only entitled to one vote. UPS was perceived as a slow and plodding until their stock split and IPO in 1999. Although UPS is much larger than FedEx, UPS chose not to compete directly in the overnight delivery market until 1982, largely because of the high cost of building an air fleet.
But after going public UPS started an aggressive series of acquisitions, beginning with a Miami-based freight carrier operating in Latin America and a franchise based chain of stores that provided packing, shipping, and mail services called Mail Boxes Etc. later names UPS, with more than 4,300 domestic and international locations. Although the company traditionally has been the industry’s low cost provider, in recent years UPS had been heavily investing in information technology, aircraft, and facilities to support service innovations, maintaining quality and reducing costs.
By 2003 UPS offered package delivery services throughout the United States, and in more than 200 countries and territories, and moved more than 13 million packages and such throughout its network daily. Domestic package operations accounted for 76% of revenues in 2002, international (15%), and nonpackage’s being (9%). In the U. S. it was estimated gross GDP was in excess of 6%. The company employed 360,000 people, (64% unionized), and owned 88,000 ground vehicles and 583 aircrafts. At the end of 2003, UPS reported assets, revenues, and profits of $28. 9 billion, $33. 4 billion, and $2. 9 billion, respectively. UPS vs. FedEx Financial Analysis UPS’ s average days outstanding ratio has been increasing over the years and in 2003 it was 51. 6 days. FedEx’s has been constant over the past 12 years and in 2003 it was at 41. 54.
It is extremely important for a company to keep a constant cash flow in a business, and to collect money from sales as quickly as they can, so they can reinvest it or purchase additional products. UPS’s total asset turnover ratio has been decreasing over the years, it was 1. 83 in 1992 and it was 1. 16 in 2003. FedEx’s total asset turnover ratio on the other hand has been increasing, from 1.38 in 1992 to 1. 64 in 1998 then down to 1. 46 in 2003. When comparing the two companies we can see that FedEx has been the best at generating more revenues per dollar of assets. UPS’s current ratio has been increasing over the years and it was at 1. 79 in 2003, similarly FedEx’s has been increasing reaching 1. 18 in 2003. Since both ratios are above 1 it indicated that both companies are capable of meeting their short-term payment obligations. However, UPS has a higher ratio, which indicates that it is the most efficient.
UPS’s debt to equity ratio has been stable over the years and was 0.26 in 2003, while FedEx’s has been decreasing and it was 0. 28 in 2003. They are about the same, and the low ratio indicates that both companies are not highly leveraged and they are liquid, which is a positive sign for investors. UPS’s times interest earned ratio is high, 36. 41 in 2003, when compared to FedEx’s, which is 10. 51. This could indicate that UPS is paying down too much debt with earnings that could be used for company growth, or it means that it has undesirable lack of debt. UPS’s net profit margin has increased over the past couple of years, being at its highest in 2002 at 10.18%, and decreasing again to 8. 65% in 2003. FedEx’s net profit margin has been steadily increasing over the years and reaching 3. 69% in 2003. When comparing the two companies we are able to see that UPS has been more successful than FedEx, which could potentially indicate that they have higher share price as well as higher levels of profitability. The return on assets as well as the return on equity have been higher for UPS. ROA was 10. 44%, and ROE was 19. 51% in 2003. FedEx’s ROA and ROE have been increasing over the years; ROA was 6. 30% and ROE 11. 39% in 2003.
This indicates that both companies have been efficiently managing their assets to generate earnings, however, when comparing the two, UPS has the higher ratio. UPS’s sales haven’t been constant over the past 12 years (92-03), the ratios showed variations from their highest at 10. 37%% to 0. 40%, and the overall ratio was 7. 32%. FedEx’s sales have been increasing, but also showed variations from 37. 79% to 3. 42%, and the overall sales ratio was 11. 53%. The average net income for the 12 years was 18. 83% for UPS and 35. 51% for FedEx, and the operating income was 12.35% for UPS and 13. 64% for FedEx. These growth ratios show that FedEx has outperformed UPS. The graphs bellow shows the growth comparison between the two companies: Performance Analysis In order to fully determine which company is for which type of investor, we must examine the competitive struggle between these two firms in the same industry. Traditionally the company that tends to have impeccable operational management garners strong financial returns. In line with this FedEx has the goal of producing “superior financial returns” and UPS follows a more “long-term competitive return”.
If one were to compare the share prices of both companies, one can discern how much value the company has generated which is reflected on the stock prices. For example in 1992 UPS stock price was $9. 25/share but by 2003 the stock price increased tremendously to $74. 55/share. This is a tremendous leap in that cumulatively that is an increase of 706% stock value since 1992. FedEx followed a similar trend in that its stock price in 1992 was $10. 19/share, which by 2003 was $63. 98/share. That is a cumulative increase of 528% over this time span.
Another thing to note is that UPS has been giving dividends from 1992 of $0. 25, which increased to $0. 92 by end of 2003. FedEx on the other hand issued no dividends since 1992 and only issued its first dividend in 2003 of $0. 20. When these two companies are indexed against the S&P 500, we can see that both have outperformed the index. For comparison purposes the S&P 500 returned 155. 20% from the time span of 1992-2003. But this is simply the compounded returns, when all adjustments are made net results of UPS and FedEx’s returns are as follows: United Parcel Services: 550.75% Federal Express: 372. 83% Economic Profit Analysis Economic Value Added is an estimate of a firm’s economic profit. In layman terms, it means the profit earned by a firm minus the cost of financing the cost of capital. For this scenario EVA is a great way to analyze how both UPS and FedEx have done over the time span. For UPS the EVA was -$70 million in 1992, which by the end of 2003 they converted to $1,195 million. In terms of cumulative appreciation, UPS accumulated $4,328 million in the 12-year time frame.
FedEx on the other hand has had negative EVA every year from 1992 up until 2002. In 2003 FedEx had a positive annual EVA. However, cumulatively FedEx had an EVA of -$2,252 million. The results greatly reflect that UPS has a better EVA than FedEx. Return on Net Assets (RONA) is used to generate a longer-term perspective of a company’s ability to create value; extraordinary expenses may be added back into the net income figure in order to determine the RONA. The RONA average for UPS from 1992 to end of 2003 was 13. 785% whereas the RONA for FedEx for the same time, averages 8. 308%.
What this reflects is that UPS performs more than 4% greater in terms of returns in comparison to FedEx. MVA or Market Value Added is the difference between the current market value of a firm and the capital invested by investors. The higher the MVA, the better it is. A high MVA indicates the company has created substantial wealth for the shareholders. A negative MVA means that a company has destroyed wealth or value that was invested. UPS’s MVA went from $7,287 million in 1992 to $69,315 million by 2003. FedEx on the other hand went from an MVA of $625 million to $11,816 million from 1992 to end of 2003.
This shows that UPS has a very large MVA, which dwarfs FedEx however in terms of percentage growth of MVA FedEx has come a long way. Outlook for the Future In terms of the courier industry the growth potential is present. Courier services will be required now and in the future, especially with a growing population and the higher demand for expedient methods of delivery. UPS and FedEx dominate the global courier services in which they each have their method of expertise. In terms of growth potential both FedEx and UPS compete heavily in the saturated U. S.market and UPS has a large presence in Europe, which it competes with the likes of DHL. However, the next potential for expansive growth is set to be for whichever can acquire the most market share from China.
It is estimated by 2039 China will surpass the United States become the largest global economy; therefore, the potential for growth is very important in that geographic location. FedEx has the largest foreign presence in China, with 11 weekly flights and it serves over 220 Chinese cities. This is reflected by the fact that FedEx’s volume in china has grown by over 50% from 2003-2004.UPS, even though has a larger worldwide presence than its counterpart, FedEx, has lagged behind in China. UPS has half the weekly flights then China however, UPS has been active in China since 1988 and was the first carrier to offer non-stop services from China to the U. S. Nevertheless, UPS has been increasing its presence in China, serving nearly 200 cities and it is estimated that peak-season demand in the courier industry for UPS would exceed the capacity that UPS can handle. FedEx pioneered the customer logistical management and is perceived as innovative, entrepreneurial, and an operational leader.
FedEx also utilized COSMOS (Customer, Operations, Service, Master Online System), which transmitted data from package movement, customer pickups, invoices, and deliveries to central databases/hubs. UPS on the other hand was initially perceived as big, bureaucratic, and an industry follower, but they have since attempted to change that image by innovating and changing its whole logistics and supply chain management. UPS utilizes DIADs (Delivery Information Acquisition Device), which are scanners that delivery personnel use to scan barcodes and log signatures. Both companies have their platform being that of Customer-centric.
They listen to their customers and adjust themselves to better cater to their customer base. Both companies for the most part are competitive in terms of price; however, UPS tends to be slightly more costly than FedEx. Both companies also focused greatly in reducing price and increasing efficiency. Overall both companies are great and both have generated tremendous wealth for their investors and both are desired by different types of investors. FedEx is a heavy growth company and surprisingly 70% of FedEx’s common shares were held by institutional investors. In terms of an analysis by Morgan Stanley’s J.J. Valentine FedEx mentions the various risks associated with the Chinese market that could stifle growth in China for FedEx; however, these are risks that can be addressed with partnerships between the Chinese government and the local population. Another analysis by the Value Line Investment Survey outlines that FedEx is poised to take advantage of the Chinese market and the international market. Since FedEx has established a large presence in China along with its infrastructure already existing in the general location, FedEx has the highest growth potential with limited costs.UPS is the market leader in the America’s however; with the saturation of the U. S. and European markets UPS’s growth potential lies on how well it can harness the Far East. UPS is also a relatively an old company existing almost a century. It has an established base and consistent growth with overall growth being larger than its counterpart FedEx. UPS’s financials are also excellent however the question truly lies in how sustainable this is into the future. In terms of recommendation UPS is for investors that wish for steady stream of growth and highly recommended for those that are risk averse.
But in terms of long-term growth potential FedEx is an excellent company to invest in. If it weren’t for institutional investors it would not own the majority of FedEx. The main mission of FedEx is to grow internationally by increasing the supply chain capabilities through e-commerce, technology and alliances. Also, the company continues to implement revenue enhancement and cost reduction programs to provide long-term revenue and profit growth and to reduce costs by taking initiatives such as Airport-to-airport transportation of Priority, Express and First-Class Mail for the U. S. Postal Service.See More on FedEx