Beruflich Dokumente
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The Battle for Value: Federal Express Corporation vs. United Parcel Service of America, Inc.
Synopsis
Time: July 1995 Want to assess the financial performance of Federal Express and UPS Two strong competitors in the overnight express package industry Not a number-crunching case, rather, we need to interpret results and reflect on the implications
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Main Issues/Objectives
The definition of excellence from a corporate finance point of view The use of economic profit analysis and the measurement of financial performance and health
Economic profit analysis vs. other classic approaches such as financial reports and ratios, and stock price performance. The opportunity to discuss the attributes of healthy and successful companies and to explore the strengths and weaknesses of economic profit.
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Main Issues/Objectives
Key learning points about economic profit: (1) its dependence on GAAP conventions, and (2) its ignorance of strategic option value. Business segment analysis to identify strong and weak sectors.
EVA
Mission Statement
Objectives
stock price market share profits EPS, P/E ratio size of the firm (assets) quality products/services best in technology .etc.
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Direct inspection of the financial statements Financial ratios EPS and P/E ratios Total returns to investors Economic Profit (Economic Value Added)
An Important Event
July 10, 1995 J.C. Penney announced the award to UPS of a $1 billion, five-year contract for delivery services. At the announcement, the stock price of FedEx fell 2.33 percent => total market value of equity declined by $85 million.
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Future Trends
Focus on product innovation, customers needs, quality, and reengineering Capital-intensive investments Shifting market shares
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Analysis: Part 1
Describe the competition in the overnight package delivery industry and the strategies by which these two firms are meeting the competition. What are the enabling and inhibiting factors facing the two firms as they pursue their goals? Do you think either firm can attain sustainable competitive advantage in this business? Objective: Explore the historical origins of the two firms
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Analysis: Part 2
Why did FedExs stock price decline at J.C. Penneys announcement? Assuming a perfectly efficient stock market, how might on interpret this loss of $85 million in FedExs market value of equity? Objective: Explore a basic idea about stock price
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Analysis: Part 3
How have Federal Express and United Parcel Service performed since the mid-1980s? Which firm is doing better? Discuss the insights you derived from the two firms financial statements, financial ratios, stock price performance, and economic profit (or EVA). Also describe how EVA is estimated, and its strengths and weaknesses as a measure of performance. Objective: Evaluate firm performances based
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Analysis: Part 4
If you had to identify one of these companies as excellent which would you choose? On what basis? More generally, what is excellence in business? Objective: A reflection on the normative implications of financial and operational performance.
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Any assessment of financial performance and health of the two firms must be based on the key drivers of expectations and contingencies. UPS was the dominant firm in the oligopolistic industry. FedEx rose as an innovator in the industry
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Before 1990 stable setting economies of scale and higher profits consistent thinking committed to a dominant product or design resist adopting innovations
1990s competition on all functional areas including service innovation, quality, and geography customer focus totally quality mgt info technology globalization strategic alliances
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The turbulent change within the industry must be a major influence on investor expectations and assessments of contingent value
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Stock price: the sum of the PV of predictable future CFs (dividends and terminal value) to shareholders plus a contingent component Why terminal value and/or contingent component might decline at the Penney announcement? Loss of expected profits from Penney and restriction of FedExs ability to finance internally
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Denying to FedEx some future business with Penney; UPSs gain is FedExs loss; Zero-sum competition in air express Signal of competitive disadvantage of FedEx relative to UPS. Whether or not the relationship with Penney was actually profitable for FedEx, the failure to win business may suggest that FedEx is slipping competitively.
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The relative strengths and weaknesses of the various criteria used to compare these two firms Interpretation of the results and assessment of the implications
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Financial criteria: strengths and weaknesses (Table 1) Interpreting the comparative results: Table 2; Insights from this table:
FedEx is growing faster than UPS on most criteria except in book assets and income (could be attributed to difference in culture, scale, or lifecycle
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$1.94
$5.34 less than S&P 500
$40.92
$34.63 more than S&P 500
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One hint from Table 2 that the demise is not FedExs fate yet.. => While EVA was $1.387 billion, MVA declined only $0.641billion. The capital markets is more optimistic than the EVA numbers. Why?? Estimation error in NOPAT and capital investment resulting from reliance on GAAP figures
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Capital Market Inefficiency: The difference between FedExs EVA and MVA could be due to overoptimism of the investors.
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