FedEx Company History

FedEx
Business model conceived by Fred Smith (undergraduate term paper) Invests $4 million of his own capital and raises an additional $91 million Company launched in 1971 with FedEx Express

Provides transportation, e-commerce and business services Four business segments: Express, Ground, Freight & Services By 2009*
$35 billion in revenues 6.9 million daily shipments 694 Jets & 22,000 ground vehicles
*Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.

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UPS Company History

UPS
Company launched in 1907 as American Messenger Company, by Jim Casey (19 years old) Company renamed United Parcel Service of America in 1929 Logistics services including: transportation, distribution, ocean and air freight, brokerage and financing

Three business segments: U.S. Domestic Package, International Package & Supply Chain, and Freight By 2009*
$45 billion in revenues 15.8 million daily shipments 268 Jets & 101,900 ground vehicles
*Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.

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Enterprise Value Calculation Flowchart

EBIT = Revenue COGS Selling & Admin Expense

NOWC = OCA - OCL

YTM of bond

CAPM

NOPAT = EBIT(1 T)

NOC = NFA + NOWC

Cost of Debt (rd)

Cost of Equity (rs)

FCF = NOPAT - NOC

WACC = wdrd(1 T) + wsrs

Enterprise Value = FCF1(1 + WACC) + FCF2(1 + WACC)2 + + FCF5(1 + WACC)5

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Historical Free Cash Flow (FCF)

2008 FedEx UPS $(53M) $5,101M

2009 $(304M) $2,083M

2010 $619M $2,224M

2011 $(47M) $3,578M

2012 $(415M)

2009 Global Economic Recession

Significant drop in business & stock value Sales revenues down for both FedEx and UPS

FedEx Express business segment hit the hardest High fuel prices

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General Assumptions for FCF Analysis

General
Global economic recovery timeline Reduced earnings forecasts in 2012/13 Trade volumes High fuel prices Corporate tax increase Boost profits by increasing shipping rates

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FedEx Assumptions for Future FCF

FedEx
Strategic acquisitions in growing global markets (Mexico, Poland, France and Brazil) Cost Cutting Plan Boost profits by $1.7 billion annually through shedding jobs, aircraft and underused assets 3-year plan starting in 2012 International Expansion South Africa, Italy, Istanbul and Turkey

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FedEx Assumptions for FCF Analysis

2013 Sales COGS/Sales S&A/Sales Tax Rate CA/Sales CL/Sales 1.25% 50.00% 70.00% 37.50% 38.94% 23.00% 2014 1.75% 50.00% 70.00% 37.50% 38.27% 23.00% 2015 2.00% 50.00% 70.00% 38.50% 37.51% 23.00% 2016 2.50% 50.00% 70.00% 38.50% 36.60% 23.00% 2017 2.50% 50.00% 70.00% 38.50% 35.53% 23.00%

Weighted average of sales growth in past years = 1.65%. Expect small drop followed by increase with economic recovery COGS + S&A based on previous average Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase Current Assets and Current Liabilities shown as percentage of total sales
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UPS Assumptions for FCF Analysis

UPS
FY13 rate increase 4.5% for UPS Air (4.9% for select destinations) 4.9% for UPS Ground Expand main European air hub in Cologne, Germany by 70% 190,000 packages per hour Targeted completion in 2013 Planned Acquisition of TNT in 2012

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UPS Assumptions for FCF Analysis

2012 Sales COGS/Sales S&A/Sales Tax Rate CA/Sales CL/Sales 2.50% 50.00% 80.00% 35.70% 29.00% 11.00% 2013 3.00% 50.00% 80.00% 35.70% 29.00% 11.00% 2014 4.00% 50.00% 80.00% 36.70% 29.00% 11.00% 2015 4.50% 50.00% 80.00% 36.70% 29.00% 11.00% 2016 5.00% 50.00% 80.00% 36.70% 29.00% 11.00%

Slow growth rate for 1st 2 years with subtle growth later COGS + S&A based on previous average in 2011 Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase Current Assets and Current Liabilities shown as percentage of total sales in 2011
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Projected FCFs

2012 FedEx UPS

* Actual FCF

2013
$1,068M $3,753M

2014
$1,048M $3,766M

2015
$1,005M $3,903M

2016
$1,013M $4,066M

2017
$1,039M

$(415M)* $3,415M

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Bond Yields (rd)

FedEx
20-year bond, non-callable, non-transferable Price $102.50, YTM 2.337% Bond Rating BBB, low-medium grade

FedEx rd used as approximation for UPS rd

No qualifying bonds for UPS

Cost of Debt
rd = YTM = 2.337% For WACC calculation.. rd = 2.337% * (1-.362) = 1.49%

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Cost of Equity (rs)

CAPM rRF RPM Cost of Equity FedEx 4.69% 7.74% 1.2386 14.28% UPS 4.69% 7.74% 0.8432 11.22%

DCF D0 D1 P0 g Cost of Equity

FedEx $0.54 $0.58 $91.46 7.70% 8.34%

UPS $2.28 $2.42 $72.50 6.17% 9.51%

Bond Yield + Risk Premium Yield Risk Premium Cost of Equity 2.337% 5.00% 7.337%

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Weighted Average Cost of Capital (WACC)

WACC = wdrd(1 T) + wsrs

FedEx Wd rd T Ws rs WACC 5.68% 2.34% 36.2% 94.32% 14.28% 13.55%

UPS 0.048% 2.34%* 35.7% 99.95% 11.22% 11.21%

*Cost of debt based in FedEx bond yield The Surviving 6 14

Enterprise Value & Stock Valuation

FedEx PV of Terminal Value PV of FCFs Enterprise Value Current Share Price Est. Intrinsic Share Value $4,050M $3,600M $7,650M $89.71 $12.49 UPS $21,318M $13,785M $35,103M $73.43 $52.99

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Questions?