Only higher net profit
UPS had a history of sterling customer and financial performance, with $1. 7billion of net income. It is also the market leader in the $17billion ground segment, and market challengers in the deferred segment and overnight express segment. With its price differentiation strategy, UPS was persistently able to capture its market share to as much as 32% in the express area.
From 1997 to 1999, UPS also outperformed FedEx financially, reporting not only higher net profit margins but also higher ROE compared to FedEx (Table 1). A unique cost structure leveraged on high daily package volumes and customer density from the ground segment, enable UPS to achieve higher delivery rates per hour through the advanced network routes. With an operating advantage in integrating ground and express business, UPS could deploy their assets more efficiently, thus attaining higher average ROA compared to FedEx.
Its emphasis on innovation and constant improvement, as well as expansion into other business segments such as supply chain management , ensures that their highest level of efficiency, reliability and speed is maintained. Their competence in utilizing invested funds to generate excellent returns is also a reason for its higher average ROE from 1996-1998. Thorough analysis of UPS’s multiples in individual years (Table 1) reveals that its outstanding performance was not sustainable.
UPS’s revenue growth, ROE and ROA plunged in 1999. The settlement of a high tax assessment, which amounted to $1. 8billion resulted in a much lower reported net income in 1999, hence, a lower net profit margin, ROE and ROA. The trend of declining revenue growth was partly due to rising costs and intense competition. In the long run, UPS’s trend of rising ROE is expected to revert to the mean by market forces . UPS’s sustainable growth rate, using 1998 financial data, is calculated to be 17. 78%.