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Corporate Value Creation
- Case 4: The Battle for Value, FedEx Corp. vs UPS
Summary of case 4:
This case assesses the financial performance of FedEx Corp. and United Parcel Service, Inc (UPS). The two firms have competed intensely for dominance of the overnight express package industry. This case is intended for use in an introductory discussion of corporate value creation and its sources.
Objectives:
The contrasting record of the two firms affords a platform to:
- Define excellence from a corporate-finance perspective.
- Assess economic profit analysis (also known as Economic Value Added) and, more generally, the measurement of financial performance and health. The case provides a complete historical economic profit analysis for both firms, and permits comparison with other classic approaches to historical performance analysis.
- Evaluate the financial implications of rigorous competition and corporate transformation.
Corporate Value Creation
Main concepts of case 4
- Economic Value added: definition, Strength and weakness, the factors that affect EVA
Key information:
1. FedEx is growing more rapidly than UPS.
2. The stunning comparison between FedEx and UPS appears in the returns to investors, given in case Exhibit 8, and summarized in the third row of Table 1.
3. Economic profit analysis is generally consistent with the market return analysis.
Table 1. The strengths and weaknesses of various financial measures.
| Strengths | Weaknesses | |
| 1. Direct inspection of the financial statements | Reveals trends Comparison of absolute sizes | Does not permit a ready assessment of efficiency Biased by size differences Book, not market, values Influenced by GAAP choices Backward, not forward, looking |
| 2. Financial ratios | Adjusts for size differences (a relative, not absolute, measure)Provides comparative measures of efficiency and growth | Based on book, not market, values Influenced by GAAP choices |
| 3. Earnings per share (EPS) and price/earnings ratios | Widely-used measures of performance Linked to market price of stock | EPS influenced by GAAP choices EPS is not a cash flow P/E difficult to interpret Sensitive to choice of observation period |
| 4. Total returns to investors | Cash flow based Market value based Permits bench marking vs. other investments | Sensitive to choice of observation period Needs to be risk adjusted |
| 5. Economic profit (EVA) | Risk adjusted Permits bench marking Theoretically linked to market values Logically appealing Increasingly widely used | Influenced by GAAP choices Ignores latent option values |
Table 2 THE BATTLE FOR VALUE, 2004: FEDEX CORP. VS. UNITED PARCEL SERVICE, INC.
Corporate Value Creation
Summary of Comparative Results
| FedEx | UPS | Source (case exhibit number) | |
| Financial ratio analysis Activity Liquidity Leverage Profitability Growth | Improving Improving Declining Worse than UPS High | Weakening Better than FedEx Consistently low Better than FedEx Lower than FedEx | 2, 3 |
| EPS EPS compound annual growth rate (CAGR) 1993–2003 EPS compound annual growth rate (CAGR) 1999–2003 | 27.54% 6.98% | 13.89% 34.30% | 8 |
| Total market returns Cum. total return (1992–2003) Cum. return net of S&P (1992–2003) | 528.02% 372.83% | 705.95% 550.75% | 8 |
| Economic profit – EVA 2003 Cumulative for 1992–2003 EVA Market value added Difference | (in millions) $170 ($2,252) $11,191 $13,443 | (in millions) $1,195 $4,328 $62,028 $57,700 | 9, 10 |
Case 4 Assignment
1) What happened to FedEx and UPS’s stock price in early 2004? Why did they rise? Why did one outpace the other? In an efficient market, how are we to interpret FedEx’s 14% increase in market value?
- how is a stock value determined?
- how does the air-transportation agreement affect the two firms stock price?
- both UPS and FedEx had been laying the foundation for a regional- and international-delivery business in China since the late 1990s. Thus, the latest announcement may indicate the market’s acceptance of that strategy and both firms’ ability to exploit that opportunity.
- FedEx had acquired air routes into China as early as 1995, whereas UPS did not begin its direct flights into China until 2001.
- how does the air-transportation agreement affect the two firms stock price?
2) How have UPS and FedEx performed financially? How do you measure financial performance? What do the financial statements and ratios show? What does the stock-price performance tell you? How is EVA calculated? What does it reveal? Does stock price track the historical EVA?
- Discuss this questions based on the table 1 and table 2 in the case study file
- EVA: a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.
3) This is a pretty depressing picture for FedEx: Why hasn’t its stock price fallen in absolute terms? How can we rationalize the expectation that FedEx will preserve the value that it currently has?
- Hint: think of the EVA limitation in table 1.
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Corporate Value Creation Case Study Essay
Part 1
What happened to FedEx and UPS’s stock price in early 2004?The stock price of both FedEx and UPS increased. There was an increase in the price of both the companies because of the companies cum total return from 1992 to 2003, as well as the EPS compound annual growth rate, is high though compound growth rate for FedEx decreased within the years 1999 to 2003. Economic value added of the two companies within 1992 to 2003 is significant. EVA is a representation of company performance and it focuses on shareholders’ value hence its high value shows that the company stock price of the companies in…
Part 2
UPS financial risk is low since its analysis ratio on leverage is low while FedEx financial risk is reducing as indicated by its leverage ratios. Both UPS and FedEx are more liquid, liquidity ratios show that both firms are performing better. Activity ratios show that FedEx is more active than UPS. In conclusion, the two firms’ financial performance is….
Part 3
FedEx profitability ratio is worse, showing that the company is less profitable. Low profitability of a company lowers the company EPS thus lowering its…..
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