September 3, 2017 | Author: Mahmood Karim | Category: United Parcel Service, Valuation (Finance), Present Value, Supply Chain, Fed Ex
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Case Study: United Parcel Service’s IPO Question 1 Ans: In the package-delivery industry timely, accurate and competitively priced services are the key success factors. With over 13 million packages delivered each business day, UPS had drastically invested in technology, which had played an important role on its growth. UPS’s well-developed computer systems had ensured to UPS customers an excellent service, which fulfills its customer, parcel needs. Moreover, the ability to provide low cost access to customer’s information about the location and contents of packages is an important success factor. The competitiveness in the package-delivery industry pushing prices down and squeezing margins is a major risk for UPS. Yet, since UPS depends on its workers for deliveries, there are some risks associated with the human factor that must be considered. There are risks that the delivery may be late, wrongly delivered, damaged packages, lost packages, or even strikes when workers refuse to work. Moreover, UPS strategy of expansion to other countries may be threaded by changes in political alliances between the countries involved in the shipping process (sending/receiving). Tariffs and other political barriers may be created as retaliation or protectionism to the national industry in the “receiving country”.

Questions 2 UPS is performing very well in comparison to its closest competitors. UPS has 51% of the domestic air and ground package delivery market share by revenue, followed by FedEx (26%) and the U.S. Postal Service (17%). Between 1988 and 1999, UPS spent more than $1 billion per year upgrading its infrastructure to track packages precisely, deliver electronic proof of delivery, and manage shipments on-line. The new systems included electronic scanners, bar codes on packages, and computerized clipboards for all UPS drivers. By 1999, UPS could handle six times as many on-line tracking requests as FedEx. UPS made no distinction between the operating facilities for air and ground operations, like FedEx. All facilities were shared, including the single fleet of trucks that handled the pickup and delivery of all UPS shipments. The integration of its air and ground operations gave UPS the ability to optimize utilization of its assets while still meeting customer service requirements. Since the operations were integrated, a package marked for “Next Day Air” delivery could be transported by truck if that method of transportation was deemed less expensive and just as reliable. UPS’s sophisticated IT systems coordinated this process. UPS is likely to sustain the strong performance they have shown in the past. UPS management had decided to focus on three emerging trends that they believe will define the package delivery industry of the future, and which will present the company with opportunities for continued growth. These are the emerging trends of globalization, e-commerce, and supply-chain management.

* Globalization - One of UPS’s major strategic growth initiatives was building capacity in non-U.S. markets—first Europe and more recently Asia and Latin America. * E-Commerce - UPS is working on UPS Returns on the Web, a service that, when unveiled, would allow customers to print a return label from their home PC to ease the process of customer returns of online purchases to the retailer of origin. * Supply chain management UPS was forging partnerships with supplier companies, from auto manufacturer suppliers to electronic component producers, which involved UPS handling the continuous flow of shipments to down-market corporate customers.

Question 3 FedEx as a company is performing well and is one of UPS’s competitors specifically in the overnight express segment of the market. FedEx operates a fleet of 634 aircrafts and 41,000 pickup and delivery vehicles, and employed 88,000 permanent full-time and 50,000 permanent part-time employees. FedEx broke new ground in delivery services when they single-handedly established the concept of overnight delivery in the early 1970’s, 9 years ahead of UPS. They were able to delivery packages around the United States and almost every country around the world within 24 hours. Its largest and most important operating unit, the overnight delivery arm, accounted for 84% of total revenues and 83% of operating income in 1998. They were able to develop a presence in the ground business by acquiring Roadway Package System (RPS), the second largest ground delivery business-to-business small-package shipper in the nation (after UPS). FedEx’s performance will continue to increase over the years. From 1995 through 1999, revenue continued to dramatically increase. Although FedEx was more known as an overnight express carrier while UPS focused more on multi-day ground delivery, their business models are quite similar. With the acquisition of RPS, who developed the premier package logistics and tracking software in the ground delivery industry, FedEx will most likely continue to evolve with new innovations to their tracking and delivery services. FedEx plans to invest in RPS’s existing ground network to expand its reach and capacity and to increase RPS’s customer service levels through enhancing technology and training. FedEx also dove into the international delivery business as a key source of growth with its international services representing 25% of total revenues and continued to grow at a rate of almost 10% annually. Another key factor in FedEx’s performance would be its superior customer service that greatly distinguishes FedEx from UPS. Because of this, FedEx was generally seen as competing most effectively at the higher-end, high-service segment of the package-delivery market. With great customer service builds lasting relationships with customers and an increase of revenue for the company.

The performance of FedEx affects the assessment of UPS’s performance sustainability because the two companies are in such close competition with one another. Although UPS is the largest ground delivery business-to-business smallpackage shipper in the nation, FedEx’s acquisition of RPS threatens UPS’s top spot. FedEx will continue to compete with UPS and could potentially take over the top spot of in delivery services. This would greatly threaten UPS’s performance sustainability. FedEx will continue to invest in new and better technology to greatly improve and differentiate themselves from UPS, which in turn will motivate UPS to do the same. If FedEx continues to improve in its performance, this will impact UPS’s performance especially if this leads to FedEx taking over UPS’s top spot in the delivery services sector. Since FedEx and UPS are close competitors, any improvements in FedEx’s performance will impact UPS’s performance sustainability. UPS has to continue to improve its performance over FedEx in order to sustain its top stop in the delivery services sector.

Question 4 Discounted Cash Flow Valuation:

Discounted Valuation



Present Value Cash Flow $4,934.67 Present Value $34,321.13



Present Value $3,360.19




Total Valuation $39,255.81

Present Value $28,722.61


Price Per Share $32.31

Beginning Book Value $7,173.00

(In Millions, except per share amounts)

Total valuation $39,255.81 Price Per Share $32.31 (In Millions, except per share amounts)

Question 5 The estimate of UPS’s value is derived from the value of its closest valuation benchmark which is FedEx. FedEx was trading on a multiple of 19.8 and a pricebook value of 2.7. Based on these multiples, UPS’s market stock price would equate to:

19.8(Multiple) x $1.55(Earning Per Share) = $30.69 (Market Price Per Share). UPS management believed that UPS was the “best of breed” in the industry. UPS felt that just as Coca-Cola’s multiple was 64% larger than PepsiCo and Wal-Mart was 59% larger than Target, so should UPS over FedEx. Based on these assumptions the multiples and therefore the price offering would require a premium to reflect its “best of breed” in the industry. The valuation would be as follows: 31.6(Premium Multiple) x $1.55($Earning Per Share) = $48.98 (Market Price Per Share) We would recommend the offering price for the IPO to reflect a premium over other firms in the industry.

Question 6 Value Earnings Ratio

Value to Book Ratio

Firm Value 39255.8

Shares Outstanding 1215

NI to common 1888.1

Share Price 32.31

Value Earnings Ratio: 20.79

Shareholder Equity 7173 Value to Book Ratio: 5.47

The VE for UPS of 20.79 is slightly higher than the 19.8 PE for FedEx. The marketto-book ratio for UPS of 5.47 is much higher than FedEx's PB ratio of 2.7. UPS is clearly performing stronger than FedEx, but it does not appear to match up to the "best of breed" firms across other industries. At 20.79, the VE ratio for UPS is substantially lower than other "best of breed" firms. Home Depot, Coca-Cola, and Wal-Mart have PE ratios of 50.9, 39.3, and 46.1, respectively. UPS's VB ratio is similarly low compared to these firms at 5.47. The "best of breed" firms have marketto-book ratios of 12.7, 15.6, and 11.6, respectively.

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