UPS IPO

1. What are the key success factors and risks for UPS given its business
strategy?
Success factors
Developed technological infrastructure
Integrated ground and air operation
Economies of scale
Market leader
Diversified strategy (delivery solutions and supply chain management)
Human resource management low turnover rate and familial working
culture (promotion from within)
Operational efficiency from rigid operational guidelines (developed by
industrial engineers, rooted in time-motion studies)
Strong financial performance (AAA rating)
70 years of reputation

Risk factors
Competitiveness drives margins lower
Human error late deliveries, damaged or lost packages, worker strikes
Tariffs and political barriers from expanding to international markets
Losing market share in each segment
o Currently leader in ground service (1-6 days) but is losing market share
each year (1990: 87%, 1999: 79%)
o Second largest market share in overnight (1990: 31%, 1999: 25%) and
deferred segment (1990: 40%, 1997: 13%)

2. How is UPS performing? What factors are driving this performance? Is
the current performance likely to be sustained? Why or why not?
Performance
UPS is presenting solid performance. Between 1994 and 1998 net income has
generally risen from $943 to $1,741, and represents a CAGR of 16.6%. UPS also
reported average net profit margins of 6.5% and ROE of 25.2%, compared to its
nearest competitor, FedEx, which reported 2.8% and 10.6% respectively.

Factors driving performance
Riding the wave of the three trends: globalisation, e-commerce and supply-
chain management
1. Globalisation - international trade in 1999 represents of US GDP
compared to 11% in 1970. UPS has acted on this trend by expanding to other
networks to match customers geographic locations and building capacity in
non-U.S. markets (Europe, Asia and Latin America).
2. E-commerce - as e-commerce sales are forecasted to increase, UPS has
strengthened its position in this new market by becoming preferred shipper for
online commerce through offering UPS functionality, pursuing partnerships
with larger e-commerce players such as eBay, and developing a returns model
that allows customers to track and return products with ease.
3. Supply-chain management - different offering compared to other parcel
delivery companies. In a competitive market it is important to distinguish
yourself from others. This segment generated 1B in incremental revenue from
1993 to 1999.

Is the performance likely to sustain?
Performance has been strong however is likely to wane in the future. Exhibit 3 shows
that overnight, deferred and ground market growth rates are forecasted to decrease in
2000-2005. However decrease in market growth will be mitigated by the fact that
UPS is pursuing alternatives to traditional brick and mortar parcel delivery (global
delivery / e-commerce delivery / supply-chain management).

Industry relies heavily on oil but prices will continue to increase in the future.
Margins will decrease.
Increase in digitalization will reduce the demand for sending mail, but not
parcels.



3. How is FedEx performing? How, if at all, does its performance and plans
affect your assessment of the sustainability of UPSs current
performance?
UPS FedEx
Sales growth rate 10.4% 5.7%
NOPAT margin 7.6% 4.1%
WC / Sales 3.2% -0.8%
Long-term assets / sales 33.7% 33.5%
Leverage 21.3% 18.4%


Historically FedEx concentrated on overnight air-express delivery whereas UPS
focused on multiday ground delivery. Over time the business models have converged,
and now FedEx is also looking at international delivery business as a key source of
growth. Whilst currently FedExs operating margins are still lower than UPS, the
company is planning on using contracting drivers and trucks which are significantly
cheaper.

Performance wise net income has increased form $307,777 to $631,333 from 1996 to
1999. This has represented a CAGR of 19.68%, which is greater than UPS.

Based on current trends, FedEx is likely to take market share from UPS.

4. Given your assessment of the companys strategy and the sustainability of
its performance, forecast the key factors for UPSs stock value.
Key factors
Credit rating
Business strategy
Company culture
Historical financial performance
Market outlook
Industry outlook
Competitors business strategy

5. What is your estimate of UPSs value and its multiples?
Given that it its profit margins and ROE are double that of FedEx, and that it the
company has taken measures to mitigate against the decreasing market growth rate,
the multiple should be adjusted higher. Furthermore, UPS has maintained an AAA
credit rating whereas FedEx has maintained a BBB credit rating, thus implying that
UPS should be able to command higher stock prices as it is financially more stable.

FedEx multiples
1. P/E = 19.8
2. P/total revenue = 0.74
3. Market/book value = 2.68

Adjusted multiples (increase factor by 2)
1. P/E = 39.6 Value = 68,943,000,000
2. P/total revenue = 1.48 Value = 16,056,000,000

6. How do your estimates of UPSs PE and PB multiples compare with those
for FedEx? How do they compare with those for the best of breed
companies multiples.

Not sure.

Adjustment for leases