United Parcel Service

United Parcel Service

Executive Summary

UPS has announced that after more than 90 years as a private company, it was planning an initial public offering to become a publicly traded company. In response to this, we will first analyze UPSЎ¦s business strategy and itЎ¦s sustainability of its current performance. Then we will look at key factors to estimate the UPSЎ¦s market capitalization value using FedExЎ¦s multiples as well as Ў§best in breedЎЁ company premiums. From this, we concluded that UPSЎ¦s IPO should create a market capitalization for UPS between $17,520 million and $30,415 million.

Evaluation

UPS is the largest parcel delivery service in the world. They also help their customers its customers with supply chain management, logistics, and financial services. UPS used to be a trucking company with technology, now itЎ¦s a technology company with trucks. One of the UPSЎ¦s key success factors is the way they manage their operations. Their carefully designed network of vehicles, sorting facilities, and hubs combined with their IT system, allows them to pick up 13 million packages each day from 2 million addresses for delivery to over 6 million commercial and residential addresses worldwide with highest levels of reliability, efficiency, and speed. Also the integration of its air and ground operations gave UPS the ability to optimize utilization of its assets while still meeting customer service requirements. Other key success factor is UPSЎ¦s human resource management. UPS has lowest turnover rates in the industry and succeeds in developing a portion of its workforce for management positions each year. The companyЎ¦s unique culture emphasized accountability and efficient execution at every level of the organization.

UPS is performing better than FedEx in financial performances. From 1997-1999, UPS reported average net profit margins of 6.5% while FedExЎ¦s was 2.8% and ROE of 25.2% for UPS and 10.6% for FedEx. Although UPSЎ¦s net income in 1999 dropped significantly, it was result of a tax dispute, which should not affect the sustainability of the UPS financial performance. One of the factors driving this performance is the growth in the international delivery business. International operations in 1999 has accounted for 13% of the UPSЎ¦s revenues and 5% of the operating profits. International package revenue grew 50% since 1994 and international package profits went from loss of $350 million in 1994 to profit of $433 million in 1999. UPS has a huge volume advantage of about 7 times in 1998 over FedEx in the ground delivery business which has a different cost structure than the express business where FedEx has the 2 to 1 volume advantage. Also UPSЎ¦s decision to operate their ground and express business as one integrated company sharing the same trucks and sorting centers gave UPS advantage over FedEx. UPS is likely to sustain the current performance since ground delivery business, which has been growing at a slower rate than express business is expected to grow faster mainly due to the expansion of Internet shopping which would provide a boost for the B2C ground business.

FedEx has not fared as well as UPS in financial performances. FedExЎ¦s total revenue has grown 60% from 1996 to 1999 while their net income has doubled in the same period. FedExЎ¦s acquisition of RPS will challenge UPS for the ground delivery business and affect the sustainability of UPSЎ¦s advantage in the ground deliver business. FedEx has been competing well in the higher-end, high-service segment of the package delivery market. Although, digitations of documents and emergence of electronic signatures is threatening the express business which FedEx has the advantage over UPS.

Analysis

If we use FexExЎ¦s multiples as benchmarks we get an average UPS market capitalization of $17,520 million. Using FedExЎ¦s trailing price to earnings ratio, we come up with UPSЎ¦s market capitalization of $13,911 million. Using FedExЎ¦s market to book ratio, UPSЎ¦s market capitalization becomes $19,111 million. Finally using FedExЎ¦s price to total revenue ratio, UPSЎ¦s market capitalization turn out to be $19,538 million.

If we benchmark UPS relative to best-of-breed(BOB) industry premium using FedEx as the industrial comparable, then we come up with an average UPS market capitalization of $ 30,415 million. Using the 58% average BOB premium for the trailing price to earnings multiple, we come up with UPS market capitalization of $21,985 million. If we use the 103% average BOB premium for the market to book multiple, then we come with UPS market capitalization of $38,845 million. UPS doesnЎ¦t seem like it deserves a BOB premium because