Finance
Assessment of the Financial Performance of UPS and FedEx
The Companies
UPS
FedEx
Selected Financial Data
Ratio Analysis
Short-Term Solvency
Long-Term Solvency
Asset Management
Profitability
Market value
For any investor assessing potential investments there will be an evaluation of the potential investment, looking at the financial performance using vertical and horizontal analysis. Further context may be given to any analysis by looking at firms in a boarder context for example, examining two firms together, especially where they are close comparators. This report will look at two major logistics firm; UPS and FedEx. The paper will start by looking at the background of the two firm, present selected but pertinent financial data and then undertake a financial analysis using ratio analysis. The analysis will then be used to assess each company’s performance.
2.
The Companies
UPS
UPS is the world’s largest shipment firm; the company’s full name is United Parcels Service (Yahoo Finance, 2014). The firm which focuses on the delivery of packages, transport provision, logistics and associated financial services, ships approximately 15 million packages every day in a global basis, to more than 6 million customers (Yahoo Finance, 2014). In United States the firm has between 46% and 50% of the total domestic market (Diffen, 2014).
Globally the company operates in more than 220 countries, including supply chain management and freight services, with a fleet that consists of approximately 101,000 road vehicles to carry packages, as well as more than 31,000 containers and establishment of his own airline (UPS, 2014; Yahoo Finance, 2014).
The firm was founded in 1907, and grew modestly at first, but in recent years the firm has pursued an aggressive growth strategy backed by significant acquisitions. For example, in 1995 SonicAir was acquired, in 1999 the firm acquired Challenge Air, Mail Boxes Etc., Inc. were acquired in 2001 and Menlo Worldwide Forwarding was acquired in 2004 (UPS, 2014). Recently expansion plans were thwarted when the proposed $6.8 million acquisition of TNT was blocked by the European Commission on the grounds it would be bad for competition (Handy Shipping Guide, 2013).
2.2
FedEx
FedEx is the world’s second largest shipment firm and operates in the same markets as UPS as a direct competitor. The firm, which was formerly known as Federal Express, adopted the shorter version of the name in 2000 (FedEx, 2014). The firm deals with more than 10 million shipments everyday across more than 200 countries and 370 different service centers (FedEx, 2014). The services are supported with a fleet of more than 90,000 road vehicles, as well as the firms own air carrier (FedEx, 2014). In the U.S. The firm has approximately 49% of the market share (Diffen, 2014).
Founded in 1973, the firm is younger than UPS, but has adopted a similar strategy in terms of growth, with expansion agency critic is by a strategy of acquisition. For example, the international logistics firm Tower Group International was acquired in 2000, in the same year as duty information company WorldTariff was acquired. In 2004 Kinko Parcel Direct were acquired (FedEx, 2014).
3.
Selected Financial Data
UPS and FedEx are major players in the logistics and shipments industry. A compare financial results, which should be noted that the financial year is not exactly aligned, the UPS financial accounting it tends in December, where as the FedEx account elections in May. The following financial analysis uses the most recent accounts published by both companies. All figures, except the ‘per share’ figures, are shown in U.S. $ millions and taken from the relevant annual reports.
The examination of their financial results indicates that UPS is the larger of the two firms, with a higher turnover. Both UPS and FedEx have been showing growth, which is slow down in most recent financial year. Both organizations have also been showing an increased level of gross profit, but the difference may be seen when looking at the net profit (after tax). Both companies appear to have it is proportional increase in the operating costs, as well as one of costs for UPS. In both cases the most recent financial year are shown a decrease in the net profit, but the decrease is most significant for UPS. This decreasing profit also impacts on the earnings per share. UPS appear to have been undertaking a share repurchase scheme which helps mitigate some of the decline in net profits, but still results in a significant decrease between December 2011 and December 2012. FedEx also has a significant decrease, but it is proportionately less than UPS, additionally, FedEx does not have any change in a number of outstanding shares.
When examining financial data it may also be argued to figures that are important to shareholders may be the total level of debt the total level of equity. In both companies there has been increasing level of debt, but this has been rising more rapidly in UPS, indicating a higher degree of leveraged taking place. Higher leverage which may equate high risk, but it may also result in higher returns at a future date as the money is invested and creates returns (Mintzberg et al., 2011). Possibly a cause for concern for shareholders is the decrease in equity at UPS which accompany the increase in debt.
The increasing debt at FedEx is more constrained; shareholders are likely to be happier as the overall level of equity is increasing.
Table 1; Financial Data
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Revenue
49,545
53,105
54,127
39,304
42,680
44,287
Gross profit
38,802
40,541
41,455
27,500
29,409
30,360
Net Profit (after tax)
3,488
3,804
1,452
2,032
1,561
Earning per share (basic)
3.51
3.88
0.84
4.57
6.44
4.95
Shares outstanding (millions)
Total debt
25,618
27,666
34,210
12,165
15,176
16,169
Total equity
7,979
7,035
4,653
15,220
14,727
17,398
As of 19 February 2014, the closing share price for UPS was $95.18, and the 52 weeks the share price has ranged between $81.51 and $105.37, with dividends providing a 2.61% yield (Yahoo Finance, 2014). The FedEx share price is higher closing at $131.35, with a range of $90.61 to $144.39 over the last 12 months, with a dividend yield of 0.44% (Yahoo Finance, 2014).
4.
Ratio Analysis
Ratio analyses may be used to examine the performance of a firm, to assess patterns as well as for benchmarking. The following sections present a range of ratios assessing different aspects of the firms performance
4.1
Short-Term Solvency
For any firm to realize its potential there has to be sufficient solvency to meet that potential. These ratios indicate the firms’ ability to meet its short-term obligations and relate to short-term financial management issues.
Table 2; Current Ratio
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Current assets
11,569
12,284
15,591
8,285
9,056
11,274
Current liabilities
5,902
6,514
8,390
7,283
9,802
16,169
Current ratio
1.96
1.88
1.86
1.14
0.92
0.70
Table 3; Cash Ratio
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Cash
3,370
3,034
7,327
2,328
2,843
4,917
Current liabilities
5,902
6,514
8,390
7,283
9,802
16,169
Cash ratio
0.57
0.47
0.87
0.32
0.29
0.30
Table 4; Interval Ratio
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Current assets
11,569
12,284
15,591
8,285
9,056
11,274
Operating costs
32,928
34,461
40,112
25,122
26,223
27,809
Daily operating costs
90.2137
94.4137
68.8274
71.84384
76.18904
Interval measure
Table 5; Net Working Capital to Assets
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Net working capital
5,667
5,770
7,201
1,002
-746
-4,895
Total assets
33,597
34,701
38,863
27,385
29,903
33,567
Ratio
0.17
0.17
0.19
0.04
-0.02
-0.15
4.2
Long-Term Solvency
The long-term solvency look at issues associated with the capital stricture and the way it capital is used and managed.
Table 6; Total Debt Ratio
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Total assets
33,597
34,701
38,863
27,385
29,903
33,567
Total equity
7,979
7,035
4,653
15,220
14,727
17,398
Ratio
0.76
0.80
0.88
0.44
0.51
0.48
Table 7; Debt to Equity Ratio
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Total debt
25,618
27,666
34,210
12,165
15,176
16,169
Total equity
7,979
7,035
4,653
15,220
14,727
17,398
debt to equity ratio
3.21
3.93
7.35
0.80
1.03
0.93
Table 8; Debt to equity multiplier
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Total assets
33597
34701
38863
27385
29903
33567
Total equity
7,979
7,035
4,653
15,220
14,727
17,398
Ratio
4.21
4.93
8.35
1.80
2.03
1.93
Table 9; Interest Coverage Ratio
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
EBIT
5,874
6,080
1,343
2,378
3,186
2,551
Interest
86
52
82
Interest coverage
16.59
17.47
3.42
27.65
61.27
31.11
4.3
Asset Management
Firms create profits by using their assets; efficient asset management is likely to result in better returns compared to poor management.
Table 10; Accounts receivable turnover
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Sales
49,545
53,105
54,127
39,304
42,680
44,287
Accounts receivables
6,117
6,246
6,111
4,581
4,704
5,044
Accounts receivable turnover
8.10
8.50
8.86
8.58
9.07
8.78
Table 11; Receivables Days
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Receivables turnover
8.10
8.50
8.86
8.58
9.07
8.78
Days
45.06
42.93
41.21
42.54
40.23
41.57
Table 12; Total Asset Turnover
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Sales
49,545
53,105
54,127
39,304
42,680
44,287
Total assets
33,597
34,701
38,863
27,385
29,903
33,567
Turnover
1.47
1.53
1.39
1.44
1.43
1.32
Table 13; Net Working Capital Turnover
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Sales
49,545
53,105
54,127
39,304
42,680
44,287
Net working capital
5,667
5,770
7,201
1,002
-746
-4,895
NWC turnover
8.74
9.20
7.52
39.23
-57.21
-9.05
4.4
Profitability
Profitability is a primary measure of business performance, indicating the level of return a firm is creating using its assets.
Table 14; Gross Profit Margin
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Sales
49,545
53,105
54,127
39,304
42,680
44,287
Gross profit
38,802
40,541
41,455
27,500
29,409
30,360
Gross profit margin
78.32%
76.34%
76.59%
69.97%
68.91%
68.55%
Table 15; Net Profit Margin
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Sales
49,545
53,105
54,127
39,304
42,680
44,287
Net profit (after tax)
3,488
3,804
1,452
2,032
1,561
Net profit margin
7.04%
7.16%
1.49%
3.69%
4.76%
3.52%
Table 16; Return on Assets
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Net income
3,488
3,804
1,452
2,032
1,561
Total assets
33597
34701
38863
27385
29903
33567
ROA
10.38%
10.96%
2.08%
5.30%
6.80%
4.65%
Table 17; Return on Equity
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
Net income
3,488
3,804
1,452
2,032
1,561
Total equity
7,979
7,035
4,653
15,220
14,727
17,398
Return on equity
43.71%
54.07%
17.34%
9.54%
13.80%
8.97%
4.5
Market value
Market value ratios deal the value of the firm relating to different measures such as share price, book value etc.
Table 18; Market Value Ratios
UPS
FedEx
Financial Year Ending
Dec-10
Dec-11
Dec-12
May-11
May-12
May-13
P/E ratio
20.9
19.1
88.5
15.2
14.7
27.7
Market to book ratio
9.0
10.0
15.1
1.6
1.9
2.6
Price to sales
1.5
1.4
1.3
0.6
0.7
1.0
Price to cash flow
19.0
10.3
9.9
6.3
6.6
10.0
5.
Assessment both firms appear to have some advantages. Both companies are showing an increased level of revenue generation, but they both face increasing operating costs. In the short-term UPS is to have suffered the most, with significant costs faced in 2012. The solvency ratios for the short-term appear to be more favorable for UPS, however, with the attempt to acquire TNT which subsequently failed, the organization may have been preparing a large number of current assets ready to make the acquisition, increasing the short-term liquidity. In both cases both UPS and FedEx appear to be satisfactorily solved.
In the longer term, UPS has a much higher gearing, with significantly higher proportional levels of debt. UPS has higher levels of debt compared to equity, and is seeing a decrease level of equity which may be of concern to shareholders. However, there is also been significant investments made, which may result in higher profits at a later date. Of particular concern may be the current rise in debt and interest rate coverage ratio of only 3.42, indicating the net profits before interest and tax will only cover the interest payments 3.42 times. FedEx is in a stronger position, with a lower level of the average and increasing equity. This may be seen as presenting a less risky profile to investors, and also offering the firm more opportunities for further leverage at a later date. However, lower levels of debt may also mean there are lower levels of investment taking place for future growth.
Asset management for both firms appears relatively comparable; with similar receivables turnovers and days, as well as similar asset turnover. However, the networking capital turnover is different, as FedEx has a negative working capital. This may be seen as beneficial in short-term, as the company does not have a high level of its own capital tied up in working capital, which is invariably unproductive.
In terms of profitability, both companies are displaying profit, although, as already discussed, UPS is showing a slightly profit margin. FedEx has a more stable profit margin, but in the first two years examined UPS profit level is higher, only dropping in the most recent year. Three is insufficient to develop an idea of profit trends, but as both companies have sufficient short-term and long-term solvency, both are making investments in the future, so there are no signs of concern.
A major consideration when looking at the potential for investment may be the current market valuations. Based on the analysis, it would appear that UPS shares have the highest level of overvaluation, with a ratio 88.5, compared to 27.74 FedEx. The book to market value is also weaker for UPS, at 15.1 competitor any 2.64 FedEx. These would indicate that of the two companies, it is UPS rather than FedEx that is overvalued. However, one must also consider that UPS appears to have some advantages, as seen in the first two years where the economies of scope and scale may have facilitated a higher net profit margin. Furthermore, the short-term problems faced by UPS are likely to be temporary, and the firm may return to profitability.
6.
Conclusion
Both UPS and FedEx are performing well, they had a difficult last year with some decrease in profits due to increased operating costs. Both have strong market positions, and are effectively using an assets. Therefore, it maybe argued both companies will provide suitable investments, they are both a very acceptable potential.
References
Diffen, (2014), FedEx vs. UPS, accessed 19th February 2014 from http://www.diffen.com/difference/FedEx_vs_UPS
FedEx, (2014), home page, accessed 19th February 2014 from www.FedEx.com
FedEx, (2013), Annual Report 2013, accessed 19th February 2014 from http://investors.FedEx.com/phoenix.zhtml?c=73289&p=irol-IRHome
FedEx, (2011), Annual Report 2011, FedEx, accessed 19th February 2014 from http://investors.FedEx.com/phoenix.zhtml?c=73289&p=irol-IRHome
Handy Shipping Guide, (2013, Jan 15), Major Express Freight and Logistics Merger Torpedoed by European Commission, accessed 19th February 2014 from http://www.handyshippingguide.com/shipping-news/major-express-freight-and-logistics-merger-torpedoed-by-european-commission_4284
UPS, (2014), home page, accessed 19th February 2014 from www.ups.com
UPS, (2013), 2012 Annual Report, retrieved 19th February 2014 from accessed 19th February 2014 from http://investors.FedEx.com/phoenix.zhtml?c=73289&p=irol-IRHome
UPS, (2011), 2010 Annual Report, retrieved 19th February 2014 from accessed 19th February 2014 from http://investors.FedEx.com/phoenix.zhtml?c=73289&p=irol-IRHome
Yahoo Finance, (2014), UPS, accessed 19th February 2014 from http://finance.yahoo.com/q/pr?s=UPS+Profile
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