Thesis: Competitor Comparison Project

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Competitor Comparison

The Companies

The companies selected for this study are FedEx Corporation (NYSE: FDX) and United Parcel Service (NYSE: UPS). These two companies are the main competitors in the courier industry both domestically and internationally. Each of these firms has a number of different businesses, but for most of these businesses they are each other's major competitor. Competitively, FedEx is stronger in air, while UPS is stronger in ground. Together, they are the world's dominant players in the courier business, by far eclipsing other companies like DHL and TNT.

FedEx was founded in 1971 by Fred Smith. The business model was to apply the logistics systems used in the military to a commercial context. A hub and spoke model was used to delivery cargo overnight to cities around the United States. This revolutionary concept was a hit, and the business expanded rapidly. Over the years, the company was able to build out its business, largely through acquisitions. FedEx Corporation as presently constituted in a holding company that overseas a variety of different businesses. These include overnight courier, ground courier, less-than-truckload freight, customs clearance, and other supply chain services. There is also FedEx Office, the former Kinko's. Today, FedEx has an estimated 252,000 employees and does almost $38 billion in sales.

UPS is an older company, having been founded in 1907 in Seattle. The UPS name was instituted in 1919 when the company added service in San Francisco. The company was a ground-based carrier for most of its existence, and built a national network. Next day air service was not instituted until 1982, bringing UPS into direct competition with FedEx for the first time. In time, UPS moved into freight, LTL, and office services (Mailboxes, Etc.). UPS has over 425, 000 staff members and did $51.5 billion in business in 2008.

Liquidity Ratios

FedEx

UPS

Liquidity Ratios

Current Ratio

1.5

1.1

Quick Ratio

1.4

0.9

X Interest Earned

n/a

n/a

FedEx has the better liquidity ratios of the two companies. Both their quick and current ratios are consistent with a healthy, liquid company. They have improved their liquidity consistently over the past five years. Current assets have grown steadily in that time period but they have kept their current liabilities at a relatively stable over the past three years. Five years ago, the current ratio at FedEx was 1.03; three years ago it was 1.18. This steady improvement in liquidity reflects growing financial strength at FedEx. The company has contained its accrued expenses. Its long-term debt has declined, so the current portion of that long-term debt has not increased significantly in recent years. Growth on the revenue side of the business, however, is reflected in a steady increase in receivable in the past five years. FedEx does not specify an interest expense.

UPS is also a liquid company, albeit less so than FedEx. Their liquidity situation has fluctuated over the past fives years, a reflection of general instability of earnings and financial situation at the company overall. For example, the current ratio was a solid 1.9 five years ago; 1.4 three years ago and has continued to deteriorate. The levels of cash and receivables have fluctuated over the past few years. There has been a dramatic increase in the past couple of years in the current portion of long-term debt. Short-term operating liabilities changed little last year, despite a sharp dropoff in business and in current assets. UPS did not record an interest expense to calculate times interest earned.

Asset Management Ratios

Asset Management Ratios

FedEx

UPS

Inventory Turnover

74.1

n/a

Receivables Turnover

9.7

8.2

Total Assets Turnover

1.5

1.5

Fixed Assets Turnover

2.8

2.8

FedEx is stronger in terms of asset management. They recorded an inventory turn of 74.1 times, although this measure is not especially valuable in the courier industry. UPS does not have a comparable. Receivables turnover measures the effectiveness of collections -- how fast does the company realize the money it makes. FedEx has improved this ratio in recent years. Five years ago it was 8.1 times; three years ago it was 9.1. This steady improvement shows FedEx is tightening the collection times thereby making better use of its working capital. The company is also improving its total assets turnover. Five-year ago this was 1.3; three years ago it was 1.4. Fixed asset turnover is a good measure for the courier business, given that the industry relies on planes, trucks and warehouses. FedEx has a fixed asset turnover of 2.8; down from 3.0 three years ago but up from 2.7 five years ago.

UPS does not record inventory, which is acceptable because the inventory measure is relatively irrelevant for this industry. In terms of receivables turnover, UPS is weaker than FedEx. Despite this, UPS has been steadily improving its receivables turnover. Five years ago it was 6.0 times and three years ago it was 7.6 times. The asset and fixed asset turnovers at UPS are in line with those at FedEx, which is unexpected given that they are much more reliant on trucks. Given that, UPS should have higher efficiency. UPS has seen more dramatic improvement in its asset turnover than has FedEx, in order to bring their ratios in line. The total asset turnover in particular has experienced significant improvement, moving from 1.1 five years ago to 1.4 three years ago.

Profitability Ratios

Profitability Ratios

FedEx

UPS

Gross Margin

25.5

29.8

Pre-Tax Margin

3.7

8.5

Net Margin

2

5

FedEx has worse profitability ratios than does UPS. The company is weaker on all three ratios. This is likely a function of being more airplane-intensive, but forced to price competitively. Margins on the airplane-bases services are generally not as high as they are for ground-based services. FedEx's gross margin has worsened over the past five years. It was at 26.7% five years ago and 28% three years ago. In general, gross margin is the most important measure in the industry, because it reflects the company's ability to match transportation capacity with demand. There been a substantial decline in the company's pre-tax margin, which three years ago was 8.9% and five years ago was 5.3%. The net margin has likewise declined, from 5.6% three years ago and 3.4% five years ago. The company's trend was to improve profitability up until a couple of years ago when rising fuel costs and reduced business began to squeeze FedEx's margins.

UPS has held a more consistent gross margin. It was 29% three years ago and 30.7% five years ago. Thus, not only has UPS a higher margin than FedEx but they have been able to maintain it consistently whereas FedEx has not. The pre-tax margin at UPS, however, has traditionally been in the 13% range. A general increase in expenses has resulted in the decline in pre-tax margin at UPS. The net margin was 8.8% three years ago and 9.1% five years ago. This decline trickled down from the pre-tax margin decreases.

Debt Management Ratios

Debt Management Ratios

FedEx

UPS

Debt Ratio

0.43

0.78

Debt-to-Equity Ratio

0.7

3.7

FedEx has significantly less leverage than does UPS. The company has a healthy balance sheet is has reduced its debt in recent years. The company's long-term debt has been reduced from $2.8 billion five years ago to $1.5 billion today. The debt ratio in that time fell from .58 to .43. Indeed, FedEx has the same amount of liabilities as it did five years ago, but has increased its assets by 34%.

The UPS balance sheet is noticeably less healthy. It is not entirely abysmal, but there is cause for concern as the company's balance sheet health has worsened over the past five years. Long-term debt has increased 139% over the past five years. Total liabilities have increased by 50% while the level of assets has dropped in that time. The debt ratio for UPS five years ago was 50% and now it is at 78%. Retained earnings have been reduced from a peak of $17.6 billion three years ago to $12.4 billion.

The increase in debt at UPS has been focused on long-term debt but "other liabilities" have also increased significantly over the past five years. There is no explanation provided for this category, but it has increased from $1.4 billion five years ago to $8.9 billion today. Another contributing factor the increase in debt ratio is the company's deteriorating cash position. While cash flows from operations have generally been strong, UPS has reduced its cash holdings from $5.2 billion give years ago to $1.0 billion.

Market Value Ratios

Market Value Ratios

FedEx

UPS

P/E

23.6

21

Market-to-Book

1.1

1.03

Market-to-Sales

0.46

1

FedEx has a slightly higher price/earnings ratio than does UPS. Their market value to sales, however is lower. The market cap of FedEx has been diminished considerably compared to that of UPS. There are several possible explanations for this. One is that FedEx is more volatile. While this is true -- FedEx's beta is 1.03 compared with 0.83 for UPS, the volatility at FedEx alone does not explain… [END OF PREVIEW]

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