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United Parcel Services IPO Case Solution
UPS, an employee-owned firm, is the largest parcel company in the world and generated an annual profit of $1.7 billion in 1999. UPS has to be known for its stable financial performance and excellent customer service. UPS has expanded its geographical scope as well as its technological capabilities in order to stay ahead of its competitors. It is questionable whether UPS will be able to sustain the growth in the coming years given the decrease in growth of the delivery industry. In 1999, UPS announced an IPO of 109 million shares. Therefore, valuation of UPS Stock became a critical decision for the firm. The valuation of UPS IPO is based on its comparison with FedEx or on Best of Breed basis. Therefore, the stock value is $17,520 million and $30,415 Million based on the market capitalization using the stock price and other multiples of FedEx shares.
Following questions are answered in this case study solution
What are the key success factors and risks for UPS given its business strategy?
How is UPS performing? What factors are driving this performance? Is the current performance likely to be sustained? Why or why not?
How is FedEx performing? How, if at all, does its performance and plans affect your assessment of the sustainability of UPS's current performance?
Given your assessment of the company's strategy and the sustainability of its performance, forecast the key factors for UPS's stock value.
What is your estimate of UPS's value and its multiples?
How do your estimates of UPS's PE and PB multiples compare with those for FedEx? How do they compare with those for the best in breed companies multiples?
Case Analysis for United Parcel Services IPO
1. What are the key success factors and risks for UPS given its business strategy?
UPS was in the delivery industry where timeliness, accuracy and pricing are key success factors. UPS realized the importance of technology in the industry and invested drastically in it. This was one of the reasons why UPS grew so much that it delivered over 13 million packages per business day. UPS spent more than a billion dollars per year between 1988 and 1999 in upgrading its technology. The new computerized system made it possible to manage shipment online by tracking packages and delivering electronic proof of delivery. This low cost and convenient access to information about the location and shipment of the packages ensured customer satisfaction and was one of the key success factors.
UPS also responded to the changing consumer price preference and shifted away from standard rates. They started using varying prices for different markets and customers based on the cost differences in different areas. Furthermore, UPS tried different marketing strategies. UPS stopped shying away from publicity and launched various ad campaigns.
UPS faces a lot competition in the package delivery industry. This might lead to price wars between the companies. For UPS, to bring the price down and reduce margins would be a major risk. Additionally, UPS depends on its workforce for prompt deliveries. Therefore, there is the risk associated with the human factor for the company. Another risk is the loss of customers due to late delivery, wrong delivery, lost packages or strikes by the labor unions. Moreover, in order to sustain its profitability and retain its customers, UPS has to expand its operations to other countries around the world. This expansion might give rise to a lot of risks for instance political instability and financial crisis. The presence of trade and political barriers can create problems for UPS while delivering packages.
2. How is UPS performing? What factors are driving this performance? Is the current performance likely to be sustained? Why or why not?
UPS, according to past trends, has been performing very well as compared to its competitors. It has over $ 25 billion of annual revenue and has become the world’s largest delivery company. It delivers around 13 million packages each business day. Over the 80s and 90s, it has not only expanded its geographical reach and variety of services but also overhauled all its operations.
In the Exhibit 3 of the case, the trend indicates that UPS will not be able to sustain its growth and profitability. This is because the package delivery industry shows decreasing growth patterns. Furthermore, UPS has shown a trend of decreasing income which shows that UPS might not be as successful in the future if it did not make any radical changes to its business strategies. Moreover, UPS has a high leverage which might lead to liquidation of the company if the company is faced with a severe financial crisis.
Currently, UPS is the ‘largest firm in the package delivery industry’. It has 34% of the market share in overnight delivery and 80% of the market share in ground delivery. In order to maintain this profitability, UPS has to continue its geographical expansion while maintaining a low leverage position. Low leverage financial position can be achieved by the initial public offerings that UPS has planned. Once this IPO is done, UPS will have more funds available for investment to maintain its current market share.
3. How is FedEx performing? How, if at all, does its performance and plans affect your assessment of the sustainability of UPS’s current performance?
FedEx was the direct competitor of UPS. Exhibit A shows the comparison between the financial positions of both companies. According to the Exhibit, UPS has a better the net profit margin of UPS than that FedEx i.e. UPS has more profit per dollar of sales. Secondly, UPS has about twice the revenue compared to that of FedEx. The operating expenses margin of both companies is almost the same.
Also, the leverage position of UPS is better than that of FedEx. Therefore, FedEx has a higher risk of solvency compared to UPS. The current ratio of UPS is also better. This indicates that UPS has a better short term liquidity position.
Exhibit 10 of the case shows a summary of operating statistics of both FedEx and UPS. The table clearly shows that UPS handles 3 times the packages handled by FedEx. UPS has more assets, investment and employees than FedEx. This is the main reason why UPS delivers higher volume of packages and has higher revenue than FedEx. After looking at the market share of both companies, it seems that UPS has the largest market share of 80% in ground delivery while FedEx is the second largest market share holder at 10%. On the other hand, FedEx has the largest market share of 46% in overnight delivery while UPS has the second largest market share of 34%. UPS also had a lesser employee turnover than FedEx. UPS was also in a better condition to pay off its debt; thus, it had an AAA credit rating. FedEx has a BBB rating as it has high operating and capital leases to finance its fixed assets (Exhibit B).
FedEx also had a different delivery process compared to UPS. While FedEx had two separate operations for ground delivery and overnight delivery, UPS used the same operations for all its deliveries. This way UPS took advantage of a simpler system and cost advantages due to economies of scale.
The preceding discussion shows that UPS is a more profitable and larger company compared to FedEx. UPS has a sophisticated and advanced technology in place for delivery of the packages which makes it more efficient and reliable in operations compared to FedEx. Unfortunately, FedEx lacks these technological capabilities.
The comparison between FedEx and UPS shows that FedEx was a significantly smaller company compared to UPS. Therefore, there is the rare chance that FedEx can threaten the sustainability of UPS in the near future. However, FedEx is the most direct competitor to UPS as it is the second largest package delivery company. In the 1980s and 1990s, UPS had to overhaul its system to catch up with FedEx. If FedEx does the same by upgrading its technology and expanding in the coming years, UPS will have serious issues of maintaining its market share.
4. Given your assessment of the company’s strategy and the sustainability of its performance, forecast the key factors for UPS’s stock value.
There are various factors that affect the stock value of a company’s stock. Firstly, the investors analyze the profitability of the company and the ability of the firm to maintain this profitability. For example, the shrinking of package delivery industry would affect the price of UPS’s share drastically. In the same way, the financial position and past profit trend of UPS will facilitate the investors in forecasting UPS’s future performance. The profitability of the firm is directly related to the stock value. An increase in profits leads to an increase in stock value. The leverage ratio is also a very significant indicator of UPS’s stock value. The higher the leverage the less is the value of UPS shares.
The performance and financial position of FedEx is also a critical determinant of the UPS’s stock value. This is because these factors help determine the current and future market share of UPS. For instance, If FedEx grows rapidly, gains customer satisfaction and increases its revenue and profits significantly, it would indicate a loss of market share. This will lead to a fall in share prices.
5. What is your estimate of UPS’s value and its multiples?
For our analysis about the stock value of UPS we can use the FedEx multiples given in Exhibit 6 as benchmark. From this we estimate that on UPS has market capitalization of value $17,520 million on average. Benchmarking the UPS relative to the best-of-breed in the industry premium on FedEx as the major competitor, UPS market capitalization turns out to be $ 30,415 million on average. The UPS’s stock value lies between $17,520 million and $30,415 Million.
6. How do your estimates of UPS’s PE and PB multiples compare with those for FedEx? How do they compare with those for the best in breed companies multiples?
FedEx stock price might not be a reliable benchmark for valuing UPS’s stock. This is because, while FedEx specializes in overnight deliveries, UPS specializes in ground deliveries. Furthermore, the operations and cost structure of both UPS and FedEx are significantly different. Similarly, based on the revenue, UPS holds 51% of market share compared to 26% of FedEx. FedEx is also a considerably smaller company compared to UPS. FedEx has lesser fixed assets and revenue. UPS has a AAA credit rating. FedEx has a rating of BBB. All these differences indicate that valuing UPS IPOs using FedEx as benchmark. UPS share price would range from $38 to $45 if FedEx is used as a benchmark for valuation.
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