The freight industry
FedEx had performed well, with revenue growing consistently from $10. 23billion in 1996 to $16. 77billion in 1999. The lower growth of 5. 67% in 1999 was attributable to the increased competition and market saturation. Also, net income had improved from $308milion to $631million in the years 1996 to 1999. FedEx had also achieved a higher net profit margin, ROE and ROA of 3. 76%, 13. 54% and 5. 93% respectively. These are evidence that FedEx had utilized its capital and assets more effectively to generate earnings.
FedEx’s adoption of a low-cost strategy, with significantly cheaper contract drivers and trucks as compared to UPS’s, increases its cost-efficiency. Its investment in sophisticated technology and capacity expansion of RPS’s ground network also enable it to reach out to more customers, thus increasing its customer service. FedEx’s constant improvements in the quality and variety of its product offerings and its performance had posed a significant threat to UPS’s sustainability. Its low-cost strategy enables FedEx for more competitive pricing, while maintaining a superior customer service level.
This had increased its market share, and impeded UPS’s expansion into new regions. Hence, to keep in pace with FedEx’s continual improvements, UPS must increase it investment to maintain its competitive positioning. This places further strains on UPS’ resources. 4) For the forecast of factors for UPS’s stock value, sales for US domestic package has an upward trend for the past 5 years as the size of the market and the package volume have increased from 1995 to 1999. The ground segment which is the core of UPS’s business has also increased.
Being the market leader in the ground segment and along with its strong branding, customer loyalty can be retained for UPS. It can also leverage on e-commerce and supply-chain management to increase its revenue. However, sales growth is expected to decline gradually and stabilize at 8. 5% as firstly, UPS experiences poor sustainability and the eventual driving of profit to “normal” competitive levels. The historic 10 year sales growth for comparable US firms has been less than 10% and this is consistent with our forecast of sales growth for UPS.
Secondly, FedEx had acquired RPS, the second largest ground delivery small package shipper after UPS and it is expected to invest considerably in its subsidiary. RPS market share has increased from 5% in 1990 to 10% in 1999. Lastly USPS would complete a comparable tracking system in 2001 which might erode some technological advantage that UPS had enjoyed earlier. 5) By using BAV software, the estimated UPS’s share price is expected to be $49. 10 over a 15-year horizon with a P/E of 62.
15x and this is consistent with our assumptions that UPS would charge a premium when they go IPO. The assumptions used are highlighted in Table 4 Estimation of UPS’s multiples are reflected in Table 5. 6) Both UPS’s P/E ratio and P/B ratio are higher. This means that its actual price per share will be generally higher than FedEx. A higher P/E indicates higher growth expectations and suggests the availability of a sustainable competitive advantage that allows the company to enjoy continual persistent earnings.
This comparison may not be a reliable benchmark for valuing UPS shares because of the differences in their operations and business strategies since UPS uses mainly financing leases while FedEx uses operating leases and there arises the issue of differing cost structures for both companies. UPS’s estimated P/B ratio pales in comparison with “best-of-breed” companies. However, its estimated P/E ratio is significantly higher than these “best-of-breed” companies’.
This implies that investors see higher potential growth in UPS in generating higher future abnormal earnings given that it has maintained an AAA rating ever since it commences its operations. From the valuation estimates, it would appear that UPS share price would constantly outperform its competitors. This sends a credible signal to investors that UPS’s management is confident of its strategies direction and sustaining its viability as a “best-of-breed” company in the freight industry.