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Krause Fund Tippie College of Business United Parcel Service, Inc. (UPS) November 17, 2015 Industrials – Air Delivery & Freight Services Stock Rating Analyst Collin McNamara [email protected]
Ryan Chapman [email protected]
William Silikowski [email protected]
Evan Ross [email protected]
Company Overview United Parcel Service, Inc. (UPS) is the largest logistics company, by revenue, in the United States and a major player in the global market. UPS provides package delivery and supply chain management across the globe. UPS’s services include distribution, forwarding, transportation, ground, air, ocean and air freight, brokering and financing. UPS operates in three segments, U.S. Domestic Package, International Package and Supply Chain & Freight. Stock Performance Highlights 52 week High $114.40 52 week Low $93.64 Beta Value 0.84 Average Daily Volume 3.28 M Share Highlights Market Capitalization $91.02 B Shares Outstanding 893.9 M Book Value per share $4.40 EPS (TTM) $4.35 P/E Ratio (TTM) 23.41 Dividend Yield 2.87% Dividend Payout Ratio 81.31% Company Performance Highlights ROA 8.71% ROE 140.5% Sales $58.23 B Financial Ratios Current Ratio 1.37 Debt to Equity 565.44%
Current Price: $102.91
Target Price: $113-$120
UPS Has the Ability to Deliver
• Growth in E-Commerce: E-commerce, which is a key growth driver, makes up 7.2% of all retail sales and continues to grow by 10-15% CAGR. • Developing Markets: UPS is currently investing in developing growth markets such as China. • Capacity: The UPS ground fleet is incomparable and allows for growth in emerging markets. • Orion: UPS’s new route efficiency software has the ability to cut millions in fuel cost and raise driver efficiency. • Labor Negotiations: Pilot negotiations have the ability to ground UPS’s aircrafts if an agreement is not met in the coming months. • Market Share: UPS is the U.S leader in their industry, allowing the company to focus on efficiency as well as growth. One Year Stock Performance
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Executive Summary
Economic Outlook
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We recommend NO ACTION to be taken on United Parcel Service Inc. (UPS). Although UPS is trading below intrinsic value and has the fleet capacity and key customer partnerships to take advantage of increased demand from the growth of e-commerce, as of now, there are hurdles UPS needs to overcome before it can take advantage of the emerging growth markets.
Price of Oil The price of crude oil has fallen to around $40 a barrel for the first time since 2009 due to oversupply. Increased emphases on hydraulic fracturing techniques has ramped up the supply of oil in the US, while global demand remains weak due to a soft global economy. The strength of the dollar is also pressuring oil prices as oil is sold in dollars allowing foreign producers to lower the price in dollar terms while maintaining the same revenue level in their own currencies. Moreover, despite this price weakness, leading oil producers such as The United States, Saudi Arabia, and Russia have maintained or have increased their production levels to secure market share.i
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The decrease in the price of oil has a positive impact for domestic logistics companies, as fuel is a large component of their cost structure. Over the next 6 months, we see the price of oil remaining around $40-$45 a barrel as oil producers continue to keep pumping to maintain market share even as demand remains weak. By 2017, we see the price of oil gradually increasing to $55-$60 a barrel as production will
eventually be cut back allowing demand to catch up with supply. Consumer Confidence Report While consumer confidence has dropped in October from 102.6 to 97.6, this is still a positive reading of how the public feels about the economy. Solid consumer confidence and employment growth should have a positive effect on the industrial sector if consumers buy more goods. However, these positives may be partially offset by the strength of the dollar, which is leading to weaker overseas sales for US industrial companies.
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We see consumer confidence remaining strong in the next couple of months staying between 95-98 as the employment picture looks strong. Over the next few years, as the stock market strengthens and employment remains high, we see confidence improving to 100. ISM Manufacturing Index With the industrial sector consisting of manufacturing and construction of goods, the ISM manufacturing index is an important variable that reflects how the sector is performing. Bloomberg’s October release reported a score of 50.1, showing the manufacturing sector is still in expansion, but at its lowest rate since May of 2013. The chart below demonstrates a decline in manufacturing over the past few months due to a slowdown in the growth in the Chinese economy and the stronger dollar, which makes US goods less competitive overseas.
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Capital Markets Outlook
Industry Analysis
Over the next couple of months, we believe ISM will drop below 50, as the weakened global economy has impacted the US financial markets. By 2017 we believe the ISM will increase to 55 as exports rebound due to an eventual improvement in emerging economies and as US companies adjust to the strong dollar.
Based on historical data over the last 10 years, the S&P 500 Industrials Index and the S&P 500 have had a correlation coefficient of .967 between their returns.v For the most part, the Industrials Index tends to outperform the S&P 500 Index when stock prices are moving up, but when the S&P 500 Index experiences negative returns, the Industrial Index begins to underperform the S&P 500 Index. The Industrials sector is very cyclical, which leads us to believe that the best time to invest is in the middle of a recession. The industrial sector performs extremely poorly during a recession, but as the economy recovers and enters the early stages of the business cycle, the industrials sector tends to outperform almost every sector.
Industry Overview According to the Global Industry Classification Standard (GICS), the industrial sector is made up of 3 industry groups with 13 distinct industries branching off. The three industry groups include capital goods, commercial services, and transportation. The capital goods industry consists of aerospace & defense, building products, construction & engineering, electrical equipment, industrial conglomerates, and machinery. The commercial services industry includes trading companies & distributors and commercial services & supplies. The transportation industry group is made up of air freight & logistics, airlines, marine, road & rail, and transportation infrastructure. Throughout this report we will be analyzing the transportation industry, explicitly the air freight & logistics industry.
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In addition, the industrial sector is one of the most cyclical sectors. As illustrated by the chart above, it outperforms almost every other sector as the economy comes out of a recession, but as the business cycle ages, growth starts to slow and the industrial sector performs in line with the market. Finally once a recession hits, the industrials sector significantly underperforms. Sub-Industry The air freight and logistics sub industry in the Industrials Sector includes companies providing air freight transportation, courier, and logistics services. Air freight shipping allows companies to ship their products both domestically and globally in a time sensitive manner. Smaller and midsized companies have benefited from air freight services as it has enabled them to participate in international trade.vii Logistics companies can be broken down into two categories: asset and non-asset based providers. Asset based providers own their own their assets, such as trucks and aircrafts, and work directly with customers to move freight, while non-asset based providers do not own assets and instead negotiate contracts between shippers and carriers.viii UPS is an example of an asset-based company, as they own 106,000 trucks and a large fleet of aircrafts. They have a large book of clients that rely on their shipments to be safe and on time. Non-asset based firms, commonly referred to as third party logistics companies (3PL’s), act as a middleman between customers and carriers. These companies have their employees negotiate contracts with carriers in order to move customers’ products in a timely fashion. 3PL’s are continuing to grow and asset-based providers are taking notice as they are acquiring these companies as subsidiaries. Recent Developments and Trends Near-shoring Near-shoring is the process of a company relocating its business to locations which are cheaper and geographically closer. ix The international rail bridge
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between Mexico and the US was finally completed after 15 years, positioning the US to increase trade with Mexico, which is the United States second largest export partner and third largest import partner.x As the cost to manufacture in China continues to grow, companies are turning to Mexico as a cheaper option as their productivity –adjusted labor cost is estimated to be 13% lower than China’s. The Mexican government has invested significant amounts of money in improving the country’s railroads, seaports, roads and bridges.xi These developments should support increased trade between the US and Mexico that should drive increased business for the air freight & logistics industry. Just-in-time In order to make production operations more efficient, cost effective, and customer responsive, logistics companies are adopting just-in-time (JIT) inventory principles.xii The ability for a company to have the right amount of inventory available to meet the demand of a production process is what makes a company successful in employing this strategy. The ability for a company to implement this strategy gives them a competitive advantage over companies who don’t implement it. This trend is driving growth for the air freight and logistics industry. While JIT has been used for inventory purposes, UPS is plans on using JIT labor for this upcoming holiday season. UPS plans to bring on 95,000 seasonal hires on just 2 to 3 days before their services are needed.xii They want to bring the labor on as needed in order to reduce costs while also being able to meet shipment goals, which should allow them to increase revenue. E-Commerce In 2014, US e-retail sales have grown to $300 billion for the first time ever and don’t seem to be slowing down. Demonstrated by the chart below, e-retail sales have increased 15.4% in 2014.
xiv
Currently, retail e-commerce sales make up about 7.2% of total retail sales, leaving room for plenty of growth. In 2015, e-commerce sales are projected to grow by 14.1%.xv The increase in retail e-commerce sales bodes
well for the air freight & logistics industry as the industry moves a significant portion of this business. Porters 5 Forces Competitive Rivalry While small companies make up the majority of the industry, large players like UPS and FedEx account for a significant portion of the market share. UPS and FedEx are in constant competition to differentiate and find competitive advantages. In order to gain advantage companies need to be able to deliver on time, have a broad delivery network, have a diverse range of clients, and have the ability to pass on cost increases to customer to help maintain profit margin.xvi Threats of New Entrants With the huge capital costs to acquire vehicles and other modes of transportation and UPS and FedEx’s strong market position, there is a low threat of large new entrants. The industry requires in depth knowledge, a broad delivery network, and is constantly updating technology to accelerate delivery time. Also, as companies continue to grow, their expenses decrease and become more efficient, making it even more difficult for new entrants. For example, UPS recently acquired Coyote Logistics, a 3PL, which will benefit UPS as Coyote continues to grow, especially during the holiday season. Threat of Substitutes Other avenues of transportation are possible threats to the air freight & logistics industry. Water and rail transportation are two competitive forms of transportation. Water transportation is a reliable mode of transportation but isn’t as time efficient as ground or air. Rail transportation is very fuel-efficient but doesn’t provide the same flexibility as ground transportation because of the lack of door-to-door service. Other potential substitutes that could revolutionize the industry would be air drones and self-driving cars. Amazon is currently testing air drones while Google is testing self-driving cars. We do not see these revolutionary substitutes impacting the industry in the near future, as they will take time to develop. We believe the threat of substitutes is moderate. Bargaining Power of Buyers Given that there are multiple modes of transportation to choose from and intense competition between UPS and FedEx, the bargaining power of buyers (shippers) is significant. Customers are looking for the most cost and time efficient way of shipping their goods, causing them to shop for the best transportation method. The major players such as UPS and FedEx are at a major advantage given they have multiple avenues of transportation, have a large global network and customer base, and have superior technology and a competitive cost structure. While the retail company has the ability to choose the mode of logistics to ship their
5
Company Analysis
products, the consumer does not as they get what the retailer has chosen to use. Bargaining Power of Suppliers Labor unions and fuel suppliers are the major influences on the industry’s cost structure. Unhappy workers have the ability to go on strike, which could potentially affect UPS as they are in labor negotiations with their pilots. Strikes can lead to goods being delivered late, or potentially not at all, leading to customers choosing another delivery company. Suppliers of fuel to UPS and FedEx have weak bargaining power because there are a number of suppliers, the cost of fuel is set in a competitive market, and the large players have bargaining power given their size. Therefore, we rate the bargaining power of suppliers as modest to moderate. Industry Leaders and Followers It’s clear that UPS and FedEx are the industry leaders in the US as they combine to make up 27.8% percent of the industry market share.xvii Below is a chart demonstrating how these companies compare to others based on their revenue and revenue produced by each employee for 2014, including Deutsche Post AG (DPSGY), a German based company, which does not compete in the US with UPS. We decided to include DPSGY to provide comparable revenue per employee for another large player. Key: Deutsche Post AG(DPSGY), United Parcel Service, Inc. (UPS) , Expeditors International of Washington Inc, (EXPD), CH Robinson Worldwide Inc. (CHRW) xviii
Company Revenue Revenue/Per
Employee UPS 58.23B $133,867 FDX 45.56B $140,206 DPSGY 64.57B $15,216 EXPD 6.79B $7,0307 CHRW 13.62B $11,8436 While the companies vary in size, the overall goal is to have the highest revenue per employee as possible, which leads to higher productivity and revenue for the firm. While DPSGY produces the largest revenue, they also have the most employees with 424,351, giving them revenue per employee in the middle of the pack. UPS and FDX seems to be the most efficient companies of the group as they have been able to produce strong revenue numbers while also leading the industry in revenue per employee.
Overview and Business Operations UPS is an air freight and delivery company that specializes in courier and home delivery services. Headquartered in Atlanta, Georgia there are 435,000
employees across the globe. Of their three segments, U.S. Domestic Package is the largest with 62% of the total revenue. Of that 62%, 71% comes from UPS’s ground shipments.
Average revenue per piece in 2014 was $9.25 and $18.15 for Domestic and International, respectively. Most of the revenue comes from larger items such as appliances. Revenue per piece actually declined from 2013-2014 due to an increase in demand for lightweight items. Geographical Distribution UPS reaches across the globe. 79% of their revenues come from the Americas, with 9% and 10% from Asia and Europe, respectively.
International expansion began in 20 emerging markets throughout 2015 and will continue to be a main initiative in the coming years. As of 2014, 87% of the revenue came from developed countries and only 10% coming from emerging markets. CEO David Abney has forecasted emerging markets to grow to 12% of total revenue in 2015.xix Financial Summary In 2014, UPS grew its revenue to $58 billion and had a net income of $3.03 billion. They have been extremely consistent in issuing dividends for the past 15 years. UPS’s dividends per share was $2.68 in 2014, an 8.1% growth from 2013. CEO David Abney has said he
22%
16% 29%
71%62%
RevenueU.S. DomesticPackage
InternationalPackage
Supply Chain &Freight
Ground
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Investment Positives
Investment Negatives
27%
39%
34%
Couriers & Local Delivery Services
FedEx
UPS
Other
expects UPS to return upwards of $30 billion to shareholders in the next five years xix UPS had a current ratio of 1.37 in 2014 and following a slight decline, due to share repurchases, in 2015, we expect their current ratio to grow to 1.44 in 2019. This ratio shows UPS is financially responsible and is not taking unnecessary risk. UPS produced an 8.7% return on assets in 2014. For a working capital intensive industry such as Air Freight and Delivery, an 8.7% ROA shows the financial strength and high asset efficiency. Key Customers UPS picks up from 1.6 million customers and delivers to millions more. One of those 1.6 million customers is Amazon. As e-commerce continues to grow, so will Amazon. As Amazon grows, as too will the volume of packages UPS will be asked to deliver. As UPS’s efficiency increases we believe they will be able to increase their share of shipments for Amazon and take further advantage of other e-commerce companies as well.xx Orion Orion, On-Road Integrated Optimization and Navigation, is a route efficiency software UPS plans to implement into its delivery vehicles to cut fuel cost and decrease emissions. UPS has not given an exact cost to the project but has been quoted saying it is a “good-sized project” of the companies $1 billon annual technology budget. UPS has also devoted 500 employees to the implementation and development of the software. During Orion’s limited testing between 2010 and 2012 UPS saved a total of 3 million gallons of fuel. Orion will only be active on 20% of UPS’s routes by the end of this year, therefore we expect cost cutting options to be even greater in the following years. We kept Orion in mind when we forecasted our fuel cost for the next five years as we expect routes to become more fuel efficient. TNT Express An acquisition of TNT Express was blocked by the European Commission in January of 2013. The commission cited a lack of viable competition to satisfy anti-trust requirements. Conditions of the acquisition agreement included a termination fee of $268 million to be paid to TNT Express as partial compensation for their drop in stock price. This is a relatively small fee and does not put UPS in financial harm. The lack of competition in the air freight and especially delivery sub-industry not only prohibited UPS from an acquisition, but it also forces UPS to rely heavily on organic growth rather than acquisitions.
Competition UPS is the U.S. leader in their sub-industry. Their competition consists of mainly FedEx and a few smaller companies. With such similarity between UPS and FedEx we have the ability to use news articles for FedEx to supplement our insight into UPS.
FedEx has a much larger fleet of aircraft compared to UPS. FedEx has used the large air fleet and partnership with USPS to deliver packages to the region by air and have USPS make the final delivery. UPS has not shown any signs of increasing their air-market share.
• E-commerce has been growing rapidly in the
United States. In the past year, the percentage of E-commerce as a percentage of total retail has grown from 6.3% to 7.2%. xxi
• UPS has 106,000 vehicles in their delivery fleet
which allows them to be more cost efficient than their competitors.
• Amazon has seen an increase in their “Prime” membership to 44 million as of the beginning of their 3rd quarter. UPS is the leading shipper for the 2-day Prime shipping option.
• The pilots for UPS have voted to authorize a
strike if their Board of Directors cannot reach an agreement on a new labor deal. The main negotiation is for increase rest time in-between flights, but also include pay and benefits. xxii
• There is a possibility of e-commerce saturation, as consumers remain hesitant to purchase products, such as food, online. Though it is worth noting we do not expect e-commerce to reach a saturation point with-in the next 5 years.
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Valuation Analysis
• UPS is self-insured. While this is allows UPS to
control cost, it also increases the risk of a large claims. Without the backing of an insurance company, UPS would be on the hook for the entire cost of a catastrophic claim.
We used the DCF, EP, DDM and Relative P/E to value UPS. The DCF and EP calculated an intrinsic stock price of $113.15. Through the DDM we calculated a slightly higher value of $120.70. UPS trades at an above average P/E ratio than its competitors. In fact, it would be considered an industry outlier in most other cases. Our calculated value of $57.37 is skewed and therefore did not have impact our investment decision. General Assumptions Continuing Value Growth Rate We forecasted our Continuing Value Growth Rate to be 3.35%. Initially, we believed the CV growth rate should have been closer to 4%. Upon further analysis, we discovered there are two threats that lower UPS’s CV growth rate. UPS is the leader in an industry with relatively low competition outside of FedEx. We do not believe this industry dominance and growth can last indefinitely, therefore the threat of competition lowered our initial CV growth rate. Additionally, the possibility of new technologies taking revenue away from UPS is already in the works. Many believe a system of small unmanned aircraft have the ability to deliver packages in a cost efficient way. Package delivery is the major revenue stream for UPS and future technologies is a threat we took into account. Revenue Decomposition UPS is segmented into three different operations. U.S. Domestic Package, International Package and Supply Chain & Freight making up 62%, 22% and 16% of UPS’s revenue, respectively. By using the average revenue per package, volume and expected inflation rates we were able to forecast revenue for the next 5 years. We believe revenue will increase 2.76% in the 2015 and average a 3.3% increase CAGR in the following years. Income Statement Like in most service based companies, compensation and benefits (wages) is a major expense. 62% of UPS’s
expenses in 2014 were contributed to wages. To forecast wages, we took the historical average of the proportion of wages to sales, 54.88%. By doing this we are assuming the revenue per employee will remain constant for the foreseeable future. It is worth noting, we have taken into account the possibility that Orion could increase the revenue per employee. However, we did not feel comfortable using this assumption in our forecast until Orion is implemented in all delivery vehicles and results are released. UPS posted an 8.6% operating margin in 2014 and a 10.9% margin TTM since September 30th, 2015. FedEx’s operating margin is much lower at 3.9% in 2014 and 4.3% TTM since August 30th, 2015. These numbers confirmed our beliefs that UPS is operating more efficiently than FedEx and is making more profits for each dollar of sales. “Other expenses” makes up about 9% of UPS’s total expenses. Due to the lack of information on what other expenses includes, we were forced to use our best judgment. In an effort to minimize the risk of incorrectly forecasting other expenses, we took the average other expenses as a percentage of sales for the past 4 years to get 7.8%. We also believe UPS will become more efficient and minimize miscellaneous cost over the years. Therefore, we forecasted a 5% decrease in other expenses as a percentage of sales year over year. To forecast depreciation expense, we calculated the historical rate of depreciation to be just over 8% of the beginning net book value. In addition, while searching for depreciation schedules, management notes stated a possible increase in depreciation due to a decrease in the useful life of their fixed assets. With this information, we decided to increase the historical depreciation rate by 1% to 9.14%. Balance Sheet Net Property, Plant and Equipment makes up over half of UPS’s total assets. Management has stated they believe $3B will be spent on capital expenditures in 2015. For years 2016-2019, we calculated the average percentage of revenue spent on capital expenditures in a given year to be 4%. The 4% was then applied to the forecasted revenue in years 2016-2019. In February of 2013, the Board of Directors approved a share repurchase plan of $10 billion. As of the end of 2014, UPS has $4.152 billion remaining on their repurchase plan. Management notes also predicted a $2.7 billion in shares to be repurchased in 2015. We then evenly distributed the remaining funds available for repurchasing among the remaining four years.
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Sensitivity Analysis
Weighted Average Cost of Capital (WACC) Cost of Equity We used the Capital Asset Pricing Model (CAPM) to calculate the required rate of return of UPS equity. The current yield for a 27-year U.S. Treasury Bond represents our risk free rate of 2.87%. We then calculated the geometric average market premium from 1928-2014. We chose this range to encompass a wide range of data. Our beta was derived from the Bloomberg Terminal using a 5 year time period with weekly returns. Our raw beta is .841. Using these inputs, our CAPM calculated a cost of equity of 6.76%. Cost of Debt We used the most recent 30-year bond issued by UPS to calculate the cost of debt. FINRA provided us a value of 3.902%. Moody’s rated UPS with a credit rating of Aa3. This rating signifies an investment grade bond in the “very low credit risk” tier. FedEx is classified as slightly riskier, with a bond rating of Baa1. We then multiplied 3.902% by one minus the marginal tax rate to get the after tax cost of debt of 2.58%. UPS does not have preferred shares outstanding as of November 17, 2015. Weight of Equity The market value of equity was calculated by multiplying the current stock price as of 11/17/15 by the number of shares outstanding to get a MV of equity of $93 billion. We then divided this number by the MV of the entire company. The weight of equity for UPS is 88.64%. Weight of Debt Total debt was calculated by finding the sum of short and long-term debt as well as adding the present value of operating leases. UPS’s total debt is $11 billion. Total debt is then divided by the MV of the company. The weight of debt for UPS is 11.36%. FedEx’s capital structure is 85.4% on equity and 14.6% debt. Since FedEx and UPS are similar in business operations and size, we expected to see similar weights. DCF and Economic Profit Analysis Our DCF and Economic Profit model was built using the key assumption that UPS will not undergo any major acquisitions in the future. Our DCF/EP model calculated an intrinsic value of $113.15. The DCF model uses FCF to represent the future cash flows for UPS. Our FCF value of 2015 is larger than in recent years to account for the extreme variation in net deferred tax liabilities in 2012 and 2014. All cash flows were then discounted using the WACC. From there, our model calculated the value of operating assets of $116 billion. After adding non-operating assets, we backed out non-operating liabilities. These including: Short/Long-Term Debt, Present Value of Operating Leases, Present
Value of ESOP, Minority Interest and Underfunded Pension. After accounting for all non-operating assets and liabilities we have a value of equity for UPS of just over $97 billion. Once our value of equity was calculated we divided by the current number of shares outstanding. Once again, this gave us an intrinsic stock price of $113.15. Our Economic Profit calculation is almost identical to the DCF model. After calculating each year’s Economic Profit, we discounted all of our values and added the beginning invested capital. We backed out non-operating assets and liabilities just like in our DCF approach. Our value of equity is $97 billion and our intrinsic stock price is $113.15 our matching values show consistency in our two valuation methods. Dividend Discount Model (DDM) The Dividend Discount Model (DDM) is the third valuation model to calculate an intrinsic stock price. UPS has issued dividends consistently for the past 15+ years. We created our model under the assumption that UPS’s dividend yield will be comparable to recent years and not grow at an unusual rate. Our dividends were forecasted for the next 5 years. Year 5’s dividends were then used to find the continuing value of cash flows. We used cost of equity and CV growth rate to grow and discount to the present value. Our DDM calculated an intrinsic stock price of $120.70. This is a higher value than our DCF/EP in part because of the increased dividend UPS is said to be paying out in the next five years.
A sensitivity analysis shows the effect a particular variable has on the intrinsic value of the equity. While building our model we determined the variables with the largest impact on our intrinsic value. To better understand the impact of our forecasting, we constructed the following sensitivity analysis. 2015 Ground Revenue While we are confident in next year’s ground revenue forecast growth of 3%, being prepared for multiple different possibilities is our responsibility. Our sensitivity analysis ranged from a decrease in revenue of 1% to an increase of 7%. Our equity value varied from $94.72 to $135.05 respectively. We do not expect a decrease in ground revenue especially considering the increase in Amazon’s Prime memberships.
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Forwarding and Logistics Forwarding and Logistics is a relatively small part of UPS’s revenue stream, accounting for just 10% of total revenue. Management has been quoted saying they are prepared to invest capital into trade lanes out of Asia in an effort to increase revenues. Our sensitivity analysis has shown that an increase in revenue growth from our forecast of 2% to 5% will only increase the intrinsic stock price to $116.82. Thus, any decisions to invest capital in the Forwarding and Logistics segment should be carefully considered to ensure return on invested capital is greater than the cost of capital. Beta UPS has a raw beta of .841. Changing beta slightly from .841 to .7 will increase the intrinsic stock price from $113.15 to $145.65, accounting for a 29% increase. Although this variation would be beneficial to UPS in theory, we have not seen much variation in the past 5 years and do not expect much in the future. Percentage of Revenue Spent on CapEx We forecasted 4% of revenues to be spent of capital expenditures in the next 5 years. By increasing this percentage to 6%, our stock price will decrease by 7% or $8. Decreasing our capital expenditure percentage would theoretically raise our intrinsic stock price but, any decrease in CapEx would decrease our continuing value growth which would result in a steep drop in stock price. Compensation and Benefits As UPS’s largest expense, compensation and benefits has a large impact on the intrinsic value of UPS. With the possibility of a labor strike with the airline pilots, it is important to understand what an increase in compensation and benefits expense would mean for the valuation of UPS. If the percentage of compensation and benefits as a percentage of sales increases by just over 1%, it would decrease the intrinsic stock price to $97.19. On the other hand, if the percentage of compensation and benefits decrease by 1% it will increase the intrinsic value of UPS to $125.80. Compensation and benefits will continue to be an important expense for our future valuations.
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Works Cited
i. Oil Prices Rally Erasing Earlier Losses
http://www.wsj.com/articles/oil-prices-higher-after-france-escalates-air-campaign-against-islamic-state-1447671197
ii. EIA Petroleum Status Report http://www.bloomberg.com/markets/economic-calendar
iii. Consumer Confidence http://www.bloomberg.com/markets/economic-calendar
iv. ISM Manufacturing Index http://www.bloomberg.com/markets/economic-calendar
v. S&P Industrials http://us.spindices.com/indices/equity/sp-500-industrials-sector
vi. Fidelity Industrials https://www.fidelity.com/sector-investing/industrials/overview
vii. What is Airfreight? http://www.farrow.com/article-what-is-air-freight
viii. Freight Shipping Companies: What’s the Difference Between Asset Based and Non-Asset Based http://www.trinitylogistics.com/blog/freight-shipping-companies-whats-the-difference-between-asset-based-and-non
ix. Near Shoring vs Offshoring http://www.gcpindustrial.com/blog/nearshoring-vs-offshoring
x. The Move to Mexico: The Trends and Challenges of Nearshoring http://www.nfiindustries.com/blog/move-mexico-trends-and-challenges-nearshoring/).
xi. Exploring Nearshoring in Mexico http://logisticsviewpoints.com/2015/03/31/exploring-nearshoring-in-mexico/
xii. A Just in Time Supply Chain? https://www.ups-scs.com/solutions/white_papers/wp_JIT.pdf
xiii. UPS Plans to Avoid Holiday Blues http://www.wsj.com/articles/ups-reports-surprise-revenue-dip-1445947423
xiv. US Annual E-Retail Sales Surpass $300 Billion for the First Time https://www.internetretailer.com/2015/02/17
/us-annual-e-retail-sales-surpass-300-billion-first-ti
xv. US Retail Sales Remain Subdued in October http://marketrealist.com/2015/11/us-retail-sales-remain-subdued-october/
xvi. IBIS WORLD http://clients1.ibisworld.com.proxy.lib.uiowa.edu/reports/gl/industry/competitivelandscape.aspx?entid=1660
xvii. IBIS WORLD http://clients1.ibisworld.com.proxy.lib.uiowa.edu/reports/gl/industry/majorcompanies.aspx?entid=1660
xviii. Yahoo Finance http://finance.yahoo.com xix. UPS 10K
http://nasdaqomx.mobular.net/nasdaqomx/7/3440/4931/
xx. UPS Worldwide https://www.ups.com/content/us/en/about/facts/worldwide.html
xxi. Merchants Watch Online Sales Data for Shifts in Buying Habits http://www.wsj.com/articles/merchants-eye-online-sales-data-for-shifts-in-buying-habits-1447497002?mod=ST1
xxii. UPS Pilots Union Votes to Authorize Strike http://www.wsj.com/articles/ups-pilots-union-votes-to-authorize-strike-1445610265
xxiii. Factset xxiv. Bloomberg Terminal
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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its Faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.
Ticker Symbol UPSCurrent Share Price $102.91Current Model Date 11/17/2015Fiscal Year End Dec. 31
WACC 6.28%Pre-Tax Cost of Debt 3.90%Beta 0.841Risk-Free Rate 2.87%Equity Risk Premium 4.62%CV Growth 3.35%CV ROIC 18.89%Current Dividend Yield 2.61%Marginal Tax Rate 33.8%Effective Tax Rate 34.61%Cost of Equity 6.76%Return on Investment 3.00%Cost of Equity 6.76%
4%2%3%
54.88%
32.77%
United Parcel Service, Inc.Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E (CV) US Domestic Package
Next Day Air 6,412 6,443 6,581 6,778 7,050 7,332 7,625 7,880 Deferred 3,392 3,437 3,672 3,819 3,972 4,131 4,296 4,440 Ground 23,052 24,194 25,598 26,366 27,684 28,792 29,943 30,946
Total US Domestic Package 32,856 34,074 35,851 36,963 38,705 40,254 41,864 43,266 Internation Package
Domestic 2,531 2,667 2,784 2,840 2,896 2,954 3,013 3,059 Export 9,033 9,166 9,586 9,826 10,071 10,323 10,581 10,740 Cargo 560 596 618 630 643 656 669 679
Total International Package 12,124 12,429 12,988 13,296 13,611 13,933 14,264 14,478 Supply Chain & Freight
Forwarding and Logistics 5,977 5,492 5,758 5,873 5,991 6,110 6,233 6,326 Freight 2,640 2,882 3,048 3,109 3,171 3,235 3,299 3,349 Other 460 561 587 599 611 623 635 645
Total Supply Chain & Freight 9,077 8,935 9,393 9,581 9,772 9,968 10,167 10,320 Total Revenue 54,057 55,438 58,232 59,840 62,089 64,155 66,295 68,064
% of Total US Domestic Package 60.78% 61.46% 61.57% 61.77% 62.34% 62.74% 63.15% 63.57%International Package 22.43% 22.42% 22.30% 22.22% 21.92% 21.72% 21.52% 21.27%Supply Chain & Freight 16.79% 16.12% 16.13% 16.01% 15.74% 15.54% 15.34% 15.16%
Total 100% 100% 100% 100% 100% 100% 100% 100%
% YOY GrowthUS Domestic Package 3.59% 3.71% 5.22% 3.10% 4.71% 4.00% 4.00% 3.35%International Package -1.02% 2.52% 4.50% 2.37% 2.37% 2.37% 2.37% 1.50%Supply Chain & Freight -0.68% -1.56% 5.13% 2.00% 2.00% 2.00% 2.00% 1.50%
Total 1.79% 2.55% 5.04% 2.76% 3.76% 3.33% 3.34% 2.67%
Daily Average Package VolumeUS Domestic Package 13,896 14,405 15,322 15,797 16,542 17,204 17,892 18,491 International Package 2,399 2,533 2,694 2,758 2,823 2,890 2,959 3,003
Average Revenue Per PieceUS Domestic Package 9.38 9.39 9.25 9.34 9.44 9.53 9.63 9.72International Package 19.13 18.54 18.15 18.86 19.59 20.36 21.15 21.98
United Parcel Service, Inc.Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E (CV)
Cash 7,327 4,665 2,291 774 1,592 2,039 2,410 3,077 Short Term Investments 597 580 992 1,012 1,032 1,053 1,074 1,095 Accounts Receivables, Net 6,111 6,502 6,661 6,894 7,153 7,391 7,637 7,841 Other Receivables - - - - - - - - Inventories 393 403 344 371 385 398 411 422 Other Current Assets 1,163 1,237 1,520 1,556 1,614 1,668 1,724 1,770 Total Current Assets 15,591 13,387 11,808 10,607 11,776 12,548 13,255 14,205
Property, Plant & Equipment - Gross 38,041 39,151 40,620 43,620 46,014 48,497 51,063 53,715 Accumulated Depreciation 20,147 21,190 22,339 24,010 25,802 27,650 29,555 31,521 Net Property, Plant & Equipment 17,894 17,961 18,281 19,610 20,211 20,848 21,508 22,194 Total Investments and Advances 842 767 1,068 1,090 1,113 1,136 1,159 1,183 Long-Term Note Receivable - - - - - - - - Net Goodwill 2,173 2,190 2,184 2,184 2,184 2,184 2,184 2,184 Net Other Intangibles 603 775 847 570 358 205 105 48 Deferred Charges - - - - - - - - Tangible Other Assets 1,076 1,022 631 631 631 631 631 631 Total Assets 38,863 36,212 34,819 34,692 36,273 37,551 38,843 40,445
Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 1,781 48 923 688 713 736 759 779 Accounts Payable 2,278 2,478 2,754 2,950 3,185 3,419 3,666 3,900 Income Tax Payable 36 48 18 26 28 30 32 36 Dividends Payable - - - - - - - - Accrued Payroll 1,927 2,325 2,373 2,463 2,556 2,641 2,729 2,801 Miscellaneous Current Liabilities 2,368 2,232 2,571 2,325 2,325 2,325 2,325 2,325 Total Current Liabilities 8,390 7,131 8,639 8,452 8,806 9,150 9,510 9,841
Long-Term Debt 11,089 10,824 9,864 11,183 11,661 11,923 12,209 12,526 Provision for Risks & Charges (Pension & Self Insured Reserves) 13,048 9,110 13,368 12,000 12,000 12,000 12,000 12,000 Total Deferred Taxes (Liabilities -Assets) (636) 1,134 (569) 1,227 1,273 1,315 1,359 1,395 Other Liabilities 1,555 1,415 1,359 1,443 1,443 1,443 1,443 1,443 Total Liabilities 33,446 29,614 32,661 34,305 35,183 35,832 36,522 37,205
Common Stock APIC 10 9 9 57 181 258 266 274 Retained Earnings 7,997 6,925 5,726 3,768 4,347 4,900 5,494 6,405
Unrealized Gain/Loss Marketable Securities/Translation (146) (346) (396) (396) (396) (396) (396) (396)Other Appropriated Reserves (3,130) (45) (3,139) (3,000) (3,000) (3,000) (3,000) (3,000) Treasury Stock (78) (69) (59) (59) (59) (59) (59) (59)Total Shareholders' Equity 4,653 6,474 2,141 370 1,073 1,702 2,304 3,224 Accumulated Minority Interest 80 14 17 17 17 17 17 17 Total Equity 4,733 6,488 2,158 387 1,090 1,719 2,321 3,241 Total Liabilities & Shareholders' Equity 38,863 36,212 34,819 34,692 36,273 37,551 38,843 40,445
Assets
United Parcel Service, Inc.Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E (CV)Sales 54,127 55,438 58,232 59,840 62,089 64,155 66,295 68,064 COGS excluding D&A
Compensation and Benfits 33,102 28,557 32,045 32,840 34,074 35,208 36,383 37,353 Repairs and Maintenance 1,228 1,240 1,371 1,412 1,465 1,514 1,565 1,606 Purchased Transportation 7,354 7,486 8,460 8,827 9,300 9,758 10,238 10,674 Fuel 4,090 4,027 3,883 3,920 3,881 4,010 4,143 3,778 Other Occupancy 902 950 1,044 1,137 1,180 1,219 1,260 1,293 Other Expenses 4,250 4,277 4,538 4,668 4,601 4,516 4,433 4,324
Depreciation 1,614 1,682 1,728 1,671 1,792 1,847 1,905 1,966 Amortization of Intangibles 244 185 195 277 212 153 100 57 EBIT (Operating Income) 1,343 7,034 4,968 5,088 5,583 5,930 6,267 7,013 Nonoperating Interest Income 100 68 60 131 86 112 127 139 Other Income (Expense) 35 84 (126) - - - - - Interest Expense 403 376 277 424 421 463 483 494 Unusual Expense - Net - - (14) - - - - - Pretax Income 1,075 6,810 4,639 4,794 5,249 5,579 5,911 6,658 Income Taxes 167 2,302 1,605 1,621 1,774 1,886 1,998 2,250 Net Income 807 4,372 3,032 3,174 3,475 3,693 3,913 4,408
EPS (recurring) 0.83 4.61 3.27 3.32 3.51 3.84 4.07 4.31Total Shares Outstanding 953 923 905 905 906 907 908 908Dividends per Share 2.28 2.48 2.68 2.69 2.84 3.11 3.30 3.49
United Parcel Service, Inc.Cash Flow Statement
Fiscal Years Ending Dec. 31 2012 2013 2014
Net Income / Starting Line 807 4,372 3,032Depreciation, Depletion & Amortization 1,858 1,867 1,923Depreciation and Depletion 1,614 1,682 1,728Amortization of Intangible Assets 244 185 195Deferred Taxes & Investment Tax Credit (1,199) (246) 385Other Funds 5,725 1,485 98Funds from Operations 7,191 7,478 5,438Changes in Working Capital 25 (174) 288Receivables (124) (515) (523)Accounts Payable (58) 218 276Income Taxes Payable -- -- --Other Accruals 98 416 106Other Assets/Liabilities 109 (293) 429Net Operating Cash Flow 7,216 7,304 5,726
Capital Expenditures (2,153) (2,065) (2,328)Net Assets from Acquisitions (100) (22) (88)Sale of Fixed Assets & Businesses 95 104 53Purchase/Sale of Investments 729 48 (375)Purchase of Investments 2,357 2,948 3,525Sale/Maturity of Investments 3,086 2,996 3,150Other Funds 94 (179) (63)Other Uses 0 (179) (63)Other Sources 94 0 0Net Investing Cash Flow (1,335) (2,114) (2,801)
Cash Dividends Paid (2,130) (2,260) (2,366)Change in Capital Stock (1,320) (3,347) (2,421)Repurchase of Common & Preferred Stk. (1,621) (3,838) (2,695)Sale of Common & Preferred Stock 301 491 274Issuance/Reduction of Debt, Net 1,729 (1,775) (169)Change in Current Debt 0 0 0Change in Long-Term Debt 1,729 (1,775) (169)Issuance of Long-Term Debt 1,745 100 1,525Reduction in Long-Term Debt (16) (1,875) (1,694)Other Funds (96) (425) (205)Net Financing Cash Flow (1,817) (7,807) (5,161)
Exchange Rate Effect 229 (45) (138)
Net Change in Cash 4,293 (2,662) (2,374)
Beg. Cash 3,034 7,327 4,665 Ending Cash 7,327 4,665 2,291
Operating Activities
Investing Activities
Financing Activities
United Parcel Service, Inc.Forecasted Cash Flow Statement
Fiscal Years Ending 2015E 2016E 2017E 2018E 2019E (CV)Operating ActivitiesNet Income 3,174 3,475 3,693 3,913 4,408 Add: Depreciation 1,671 1,792 1,847 1,905 1,966 Add: Amortization 277 212 153 100 57 Changes in:Accounts Receivable Net (233) (259) (238) (247) (204)Inventories Net (27) (14) (13) (13) (11)Other Current Assets (36) (58) (54) (56) (46) Accounts Payable 196 235 234 247 234 Total Deferred Taxes (Liabilites-Assets) 1,796 46 42 44 36 Income Tax Payable 8 2 2 2 4 Accrued Payroll 90 93 85 88 73 Other Liabilities 84 - - - - Miscellaneous Current Liabilities (246) - - - - Net Operating Cash Flow 6,754 5,524 5,752 5,984 6,517
Investing ActivitiesShort-term Investments (20) (20) (21) (21) (21) Gross Propert Plant and Equipment (3,000) (2,394) (2,484) (2,566) (2,652) Net Goodwill - - - - - Total Investments and Advances (22) (23) (23) (24) (24) Provision for Risk & Charges (1,368) - - - - Net Investing Cash Flow (4,410) (2,436) (2,527) (2,611) (2,697)
Financing ActivitiesST Debt & Current Portion LT Debt (235) 25 23 24 20 Cash Dividends Paid (2,432) (2,571) (2,815) (2,994) (3,172) Long-Term Debt 1,319 478 262 286 317 Long-Term Note Receivable - - - - - Minority Interest - - - - - Other Appropriate Reserves 139 - - - - Common Stock and APIC 48 124 76 8 8 Purchase of Treasury Stock (2,700) (325) (325) (325) (325)Net Financing Cash Flow (3,860) (2,269) (2,779) (3,002) (3,152)
Net Cash Flows from All Activities: (1,517) 818 446 371 667
Beg. Cash 2,291 774 1,592 2,039 2,410 Ending Cash 774 1,592 2,039 2,410 3,077
United Parcel Service, Inc.Common Size Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E (CV)Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%COGS
Compensation and Benfits 61.16% 51.51% 55.03% 54.88% 54.88% 54.88% 54.88% 54.88%Repairs and Maintenance 2.27% 2.24% 2.35% 2.36% 2.36% 2.36% 2.36% 2.36%Purchased Transportation 13.59% 13.50% 14.53% 14.75% 14.98% 15.21% 15.44% 15.68%Fuel 7.56% 7.26% 6.67% 6.55% 6.25% 6.25% 6.25% 5.55%Other Occupancy 1.67% 1.71% 1.79% 1.90% 1.90% 1.90% 1.90% 1.90%Other Expenses 7.85% 7.71% 7.79% 7.80% 7.41% 7.04% 6.69% 6.35%Depreciation 2.98% 3.03% 2.97% 2.79% 2.89% 2.88% 2.87% 2.89%
Historical Depreciation Rate 9.16% 9.40% 9.62% - - - - -Amortization of Intangibles 0.45% 0.33% 0.33% 0.46% 0.34% 0.24% 0.15% 0.08%
EBIT (Operating Income) 2.48% 12.69% 8.53% 8.50% 8.99% 9.24% 9.45% 10.30%Nonoperating Interest Income 0.18% 0.12% 0.10% 0.22% 0.14% 0.17% 0.19% 0.20%Other Income (Expense) 0.06% 0.15% -0.22% - - - - - Interest Expense 0.74% 0.68% 0.48% 0.71% 0.68% 0.72% 0.73% 0.73%Unusual Expense - Net - - -0.02% - - - - - Pretax Income 1.99% 12.28% 7.97% 8.01% 8.45% 8.70% 8.92% 9.78%Income Taxes 0.31% 4.15% 2.76% 2.71% 2.86% 2.94% 3.01% 3.31%Net Income 1.49% 7.89% 5.21% 5.30% 5.60% 5.76% 5.90% 6.48%
United Parcel Service, Inc.Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E (CV)
Cash 13.54% 8.41% 3.93% 1.29% 2.56% 3.18% 3.64% 4.52%Total Short Term Investments 1.10% 1.05% 1.70% 2% 2% 2% 2% 2%Accounts Receivables, Net 11.29% 11.73% 11.44% 11.52% 11.52% 11.52% 11.52% 11.52%Other Receivables - - - - - - - - Inventories 0.73% 0.73% 0.59% 0.62% 0.62% 0.62% 0.62% 0.62%Other Current Assets 2.15% 2.23% 2.61% 2.60% 2.60% 2.60% 2.60% 2.60%Total Current Assets 28.80% 24.15% 20.28% 18.03% 19.30% 19.92% 20.38% 21.26%
Property, Plant & Equipment - Gross 70.28% 70.62% 69.76% 72.89% 74.11% 75.59% 77.02% 78.92%Accumulated Depreciation 37.22% 38.22% 38.36% 40.12% 41.56% 43.10% 44.58% 46.31%Net Property, Plant & Equipment 33.06% 33.18% 33.77% 32.77% 32.55% 32.50% 32.44% 32.61%Total Investments and Advances 1.56% 1.38% 1.83% 1.82% 1.79% 1.77% 1.75% 1.74%Long-Term Note Receivable - - - - - - - - Net Goodwill 4.01% 3.95% 3.75% 3.65% 3.52% 3.40% 3.29% 3.21%Net Other Intangibles 1.11% 1.40% 1.45% 1.29% 1.29% 1.29% 1.29% 1.29%Deferred Charges - - - - - - - - Tangible Other Assets 1.99% 1.84% 1.08% 1.05% 1.02% 0.98% 0.95% 0.93%Total Assets 71.80% 65.32% 59.79% 58.62% 59.47% 59.86% 60.10% 61.03%
Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 3.29% 0.09% 1.59% 1.15% 1.15% 1.15% 1.15% 1.14%Accounts Payable 4.21% 4.47% 4.73% 4.93% 5.13% 5.33% 5.53% 5.73%Income Tax Payable 0.07% 0.09% 0.03% 0.04% 0.05% 0.05% 0.05% 0.05%Dividends Payable - - - - - - - - Accrued Payroll 3.56% 4.19% 4.08% 4.12% 4.12% 4.12% 4.12% 4.12%Miscellaneous Current Liabilities 4.37% 4.03% 4.42% 3.89% 3.74% 3.62% 3.51% 3.42%Total Current Liabilities 15.50% 12.86% 14.84% 14.12% 14.18% 14.26% 14.35% 14.46%
Long-Term Debt 20.49% 19.52% 16.94% 18.69% 18.78% 18.59% 18.42% 18.40%Provision for Risks & Charges 24.11% 16.43% 22.96% 20.05% 19.33% 18.70% 18.10% 17.63%Total Deferred Taxes (Liabilities -Assets) -1.18% 2.05% -0.98% 2.05% 2.05% 2.05% 2.05% 2.05%Other Liabilities 2.87% 2.55% 2.33% 2.41% 2.32% 2.25% 2.18% 2.12%Total Liabilities 61.79% 53.42% 56.09% 57.33% 56.67% 55.85% 55.09% 54.66%
Common Stock APIC 0.02% 0.02% 0.02% 0.10% 0.29% 0.40% 0.40% 0.40%Retained Earnings 14.77% 12.49% 9.83% 6.30% 7.00% 7.64% 8.29% 9.41%Cumulative Translation Adjustment/Unrealized For. E -0.28% -0.62% -0.68% -0.66% -0.64% -0.62% -0.60% -0.58%Unrealized Gain/Loss Marketable Securities 0.01% 0.00% - - - - - - Other Appropriated Reserves -5.78% -0.08% -5.39% -5.01% -4.83% -4.68% -4.53% -4.41%Treasury Stock -0.14% -0.12% -0.10% -0.10% -0.10% -0.09% -0.09% -0.09%Total Shareholders' Equity 8.60% 11.68% 3.68% 0.62% 1.73% 2.65% 3.48% 4.74%Accumulated Minority Interest 0.15% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.02%Total Equity 8.74% 11.70% 3.71% 0.65% 1.76% 2.68% 3.50% 4.76%Total Liabilities & Shareholders' Equity 71.80% 65.32% 59.79% 57.97% 58.42% 58.53% 58.59% 59.42%
Assets
United Parcel Service, Inc.Value Driver Estimation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E (CV)NOPLAT ComputationEBITA:Sales 54,127 55,438 58,232 59,840 62,089 64,155 66,295 68,064 COGS excluding D&A 50,926 46,537 51,341 52,804 54,501 56,225 58,022 59,028 Depreciation & Amortization Expense 1,858 1,867 1,923 1,948 2,004 2,000 2,005 2,023 **Beg. EBITA 1,343 7,034 4,968 5,088 5,583 5,930 6,267 7,013 Interest on PV Operating Leases 48 49 42 45 48 50 51 53 End EBITA 1,391 7,083 5,010 5,133 5,632 5,979 6,318 7,065 Less: Adjusted TaxesProvision for Income Taxes 167 2,302 1,605 1,621 1,774 1,886 1,998 2,250 Marginal Tax Rate 28.9% 35.8% 33.8% 33.8% 33.8% 33.8% 33.8% 33.8%Less: Tax on Non-Operating Interest Income 29 24 20 44 29 38 43 47 Less: Other Income (Expense) 10 30 (43) - - - - - Plus: Tax Shield on Interest Expense 116 135 94 143 142 157 163 167 Plus: Unusual Expense - Net - - (5) - - - - - Plus: Tax Shield On Lease Interest 14 18 14 15 16 17 17 18 Total Adjusted Taxes 258 2,400 1,730 1,735 1,903 2,021 2,136 2,388 Net Deferred Tax Liability (3,220) 2,344 (2,245) 1,796 46 42 44 36
NOPLAT (2,088) 7,027 1,035 5,194 3,774 4,001 4,227 4,714
Normal CashNormal Cash Percentage of Revenue 5% 5% 5% 5% 5% 5% 5% 5%Revenue 54,127 55,438 58,232 59,840 62,089 64,155 66,295 68,064 Normal Cash (Revenue * %) 2,706 2,772 2,912 2,992 3,104 3,208 3,315 3,403 Actual Cash 7,327 4,665 2,291 774 1,592 2,039 2,410 3,077 Lower of Normal Cash or Actual Cash 2706 2772 2291 774 1592 2039 2410 3077
Invested Capital Operating Current Assets
Normal Cash 2,706 2,772 2,291 774 1,592 2,039 2,410 3,077 Accounts Receivable 6,111 6,502 6,661 6,894 7,153 7,391 7,637 7,841 Other Receivables - - - - - - - - Inventory 393 403 344 371 385 398 411 422 Prepaid Expenses and Other Current Operating Assets 1,163 1,237 1,520 1,556 1,614 1,668 1,724 1,770
Non-Interest Bearing Current LiabilitiesAccounts Payable 2,278 2,478 2,754 2,950 3,185 3,419 3,666 3,900 Accrued Expenses/Payroll 1,927 2,325 2,373 2,463 2,556 2,641 2,729 2,801 Dividends Payable - - - - - - - - Income Taxes Payable 36 48 18 26 28 30 32 36 Miscellaneous Current Liabilities 2,368 2,232 2,571 2,325 2,325 2,325 2,325 2,325
Net Operating Working Capital 3,764 3,831 3,100 1,831 2,651 3,080 3,431 4,048 Net Property Plant and Equipment 17,894 17,961 18,281 19,610 20,211 20,848 21,508 22,194 Net Other Intangibles 603 775 847 570 358 205 105 48 Capitalized Present Value of Operating Leases 1,257 1,074 1,149 1,232 1,270 1,310 1,351 1,395
Net Other Operating Activities 1,860 1,849 1,996 1,802 1,628 1,515 1,456 1,443 Less Other Operating Liabilities 1,555 1,415 1,359 1,443 1,443 1,443 1,443 1,443 Invested Capital 21,963 22,226 22,018 21,801 23,047 24,000 24,952 26,242 NOPLAT (2,088) 7,027 1,035 5,194 3,774 4,001 4,227 4,714 Beg. Invested Capital 23,010 21,963 22,226 22,018 21,801 23,047 24,000 24,952 ROIC -9.1% 32.0% 4.7% 23.6% 17.3% 17.4% 17.6% 18.9%NOPLAT (2,088) 7,027 1,035 5,194 3,774 4,001 4,227 4,714 Capital Expenditures (1,047) 263 (209) (217) 1,247 953 952 1,289 FCF (1,040) 6,764 1,243 5,411 2,528 3,048 3,274 3,424 Beg. Invested Capital 23,010 21,963 22,226 22,018 21,801 23,047 24,000 24,952 ROIC-WACC -15.4% 25.7% -1.6% 17.3% 11.0% 11.1% 11.3% 12.6%Economic Profit (EP) (3,533) 5,648 (362) 3,811 2,405 2,553 2,719 3,146
United Parcel Service, Inc.Weighted Average Cost of Capital (WACC) Estimation
Beta 0.841Risk Premium 4.62%Risk Free Rate 2.87%Cost of Equity 6.76%Pre-Tax Cost of Debt (2042) 3.90%Tax Rate 33.8%Cost of Preferred 0%After-Tax Cost of Debt 2.58%DebtShort Term Debt 923$ Long Term Debt 9,864$ PV of Operating Leases 1,149$ Total Debt 11,936$ EquityStock Shares 905.00Price Per Share 102.91$ Market Cap 93,133.55$ MV of the Company 105,069.25$ MV Weight of Debt 11.36%MV Weight of Equity 88.64%MV Weight of Preferred 0%WACC 6.28%
United Parcel Service, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 3.35% CV ROIC 18.89% WACC 6.28% Cost of Equity 6.76%
Fiscal Years Ending Dec. 31 2014 2015E 2016E 2017E 2018E 2019E (CV)FCF 5,411 2,528 3,048 3,274 3,424
DCF ModelFCF to Discount 5,411 2,528 3,048 3,274 132,277 CVPeriod to Discount 1 2 3 4 4 PV (CF) 5,091 2,238 2,539 2,566 103,670
Value of Operating Assets 116,104 Plus: Excess Cash - Plus: Short-Term Investments 992 Plus: Tangible Other Assets 631 Less: Short-Term Debt 923 Less: Long-Term Debt 9,864 Less: PV of Operating Leases 1,149 Less: PV of ESOP 108 Less: Minority Interest 17 Less: Underfunded Pension 8,693 Value of Equity 96,974 Number of Shares Outstanding 905 Intrinsic Value of Stock 107.15
Fraction of Fiscal Year Elapsed 0.83Adjusted Stock Price 113.15
EP ModelWACC 6.28%EP to Discount 3,811 2,405 2,553 2,719 3,146 CV 107,325 Beginning Invested Capital 22,018 Periods to Discount 1 2 3 4 4PV (CF) 3,586 2,129 2,127 2,131 84,114
Value of Operating Assets 116,104 Plus: Excess Cash - Plus: Short-Term Investments 992 Plus: Tangible Other Assets 631 Less: Short-Term Debt 923 Less: Long-Term Debt 9,864 Less: PV of Operating Leases 1,149 Less: PV of ESOP 108 Less: Minority Interest 17 Less: Underfunded Pension 8,693 Value of Equity 96,974 Number of Shares Outstanding 905 Intrinsic Value of Stock 107.15
Fraction of Fiscal Year Elapsed 0.83Adjusted Stock Price 113.15
United Parcel Service, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2014 2015E 2016E 2017E 2018E 2019E (CV)
EPS 3.27 3.32 3.51 3.84 4.07 4.31
Key Assumptions CV growth 3.35% CV ROE 136.01% Cost of Equity 6.76%
Future Cash Flows P/E Multiple (CV Year) 28.64 EPS (CV Year) 4.31 Future Stock Price 113.15 Dividends Per Share 2.68 2.69 2.84 3.11 3.30 3.49 Future Cash Flows Period 0 1 2 3 4 4 Discounted Cash Flows 2.68 2.52 2.84 3.11 3.30 102.54
Intrinsic Value 114.30$ Fraction of Fiscal Year Elapsed 0.83$ Adjusted Stock Price 120.70$
United Parcel Service, Inc.Relative Valuation Models
EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16FDX FedEx $159.12 $10.68 $12.33 14.9 12.9 10.0 1.49 1.29 EXPD Expeditors International $49.75 $2.37 $2.55 21.0 19.5 11.0 1.91 1.77 DPSGY Deutsche Post $29.74 $1.86 $2.12 16.0 14.0 9.0 1.78 1.56 ATSG Air Transport Sevices 8.95$ $0.57 $0.67 15.7 13.4 3.8 4.13 3.52 CHRW C.H. Robinson 67.02$ $3.50 $3.77 19.1 17.8 10.3 1.87 1.73
Average 17.3 15.5 1.7 1.5
UPS United Parcel Service, Inc. $102.91 $3.32 $3.51 31.0 29.3 5.38% 5.8 5.5
Implied Value: Relative P/E (EPS15) $ 57.37 Relative P/E (EPS16) 54.29$ PEG Ratio (EPS15) 0.31$ PEG Ratio (EPS16) 0.29$
Percentage of revenue spent on CapEx113.1525 1% 2% 3% 4% 5% 6% 7%
-1% 112.16 105.61 99.09 94.67 90.80 86.94 83.070% 116.78 110.15 103.56 99.00 95.09 91.18 87.281% 121.59 114.89 108.22 103.52 99.57 95.62 91.672% 126.61 119.83 113.09 108.23 104.24 100.25 96.26
2015 Revenue (Ground) 3% 131.83 124.98 118.16 113.15 109.12 105.09 101.054% 137.27 130.34 123.44 118.28 114.20 110.13 106.055% 142.93 135.92 128.93 123.62 119.50 115.38 111.266% 148.81 141.72 134.66 129.19 125.02 120.85 116.697% 154.93 147.76 140.61 134.98 130.77 126.56 122.35
Beta113.1525 0.7 0.75 0.8 0.841 0.85 0.9 0.95
4.40% 155.70 141.58 129.58 120.99 119.24 110.24 102.334.50% 150.95 137.28 125.64 117.32 115.61 106.88 99.21
Risk Premium 4.62% 145.57 132.41 121.19 113.15 111.51 103.08 95.664.70% 142.18 129.32 118.37 110.52 108.91 100.67 93.424.80% 138.12 125.64 114.99 107.36 105.80 97.78 90.73
Compensation and Benefits113.1525 50% 51% 52% 53% 54% 54.88% 56% 57% 58% 59% 60%
-1% 161.25 147.15 133.07 119.01 105.99 94.67 80.25 67.37 54.50 41.62 28.750% 167.39 152.93 138.49 124.08 110.62 99.00 84.20 70.99 57.78 44.58 31.371% 173.78 158.96 144.15 129.36 115.45 103.52 88.33 74.78 61.22 47.66 34.102% 180.45 165.24 150.04 134.87 120.48 108.23 92.64 78.73 64.81 50.89 36.97
2015 Revenue 3% 187.39 171.78 156.19 140.61 125.73 113.15 97.14 82.85 68.55 54.26 39.964% 194.62 178.59 162.58 146.59 131.20 118.28 101.83 87.14 72.46 57.77 43.095% 202.14 185.68 169.24 152.82 136.90 123.62 106.72 91.63 76.53 61.44 46.356% 209.96 193.06 176.17 159.30 142.84 129.19 111.81 96.30 80.78 65.27 49.757% 218.09 200.73 183.38 166.04 149.02 134.98 117.11 101.16 85.21 69.26 53.31
Ground Revenue113.1525 -1% 0% 1% 2% 3% 4% 5% 6% 7%
-2% 91.62 95.95 100.47 105.19 110.11 115.23 120.58 126.14 131.93-1% 92.33 96.66 101.18 105.90 110.82 115.95 121.29 126.85 132.640% 93.08 97.41 101.93 106.64 111.56 116.69 122.03 127.60 133.391% 93.85 98.18 102.71 107.42 112.34 117.47 122.81 128.37 134.17
F&L 2% 94.67 99.00 103.52 108.23 113.15 118.28 123.62 129.19 134.983% 95.51 99.84 104.36 109.08 114.00 119.13 124.47 130.03 135.824% 96.40 100.73 105.25 109.96 114.88 120.01 125.35 130.92 136.715% 97.32 101.65 106.17 110.88 115.80 120.93 126.27 131.84 137.636% 98.27 102.61 107.13 111.84 116.76 121.89 127.23 132.79 138.59
CV Growth Rate113.1525 0% 1% 2% 3.35% 4% 4% 5% 6% 7%
-1% 51.60 58.73 69.20 94.67 99.02 117.67 198.64 854.97 -315.530% 53.76 61.26 72.25 99.00 103.57 123.16 208.21 897.59 -331.851% 56.02 63.89 75.43 103.52 108.32 128.89 218.20 942.14 -348.932% 58.36 66.63 78.75 108.23 113.28 134.88 228.64 988.67 -366.77
2015 Revenue 3% 60.81 69.48 82.21 113.15 118.45 141.12 239.53 1037.25 -385.414% 63.35 72.46 85.81 118.28 123.83 147.62 250.89 1087.95 -404.875% 66.00 75.55 89.56 123.62 129.45 154.40 262.73 1140.83 -425.176% 68.76 78.77 93.46 129.19 135.30 161.47 275.07 1195.96 -446.357% 71.63 82.12 97.52 134.98 141.38 168.82 287.93 1253.42 -468.43
United Parcel Service, Inc.Key Management Ratios
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E (CV)
Liquidity RatiosCurrent Ratio Current Assets/Current Liabilities 1.86 1.88 1.37 1.25 1.34 1.37 1.39 1.44Quick Ratio (Current Assets-Inventories) / Current Liabilities 1.81 1.82 1.33 1.21 1.29 1.33 1.35 1.40Net Working Capital Current Assets - Current Liabilities 7201 6256 3169 2155 2970 3397 3745 4364
Activity or Asset-Management RatiosRecievables Turnover Net Revenue / Accounts Receivable 8.76 8.79 8.85 8.83 8.84 8.82 8.82 8.79Total Assset Turnover Total Revenue / Total Assets 1.39 1.53 1.67 1.72 1.71 1.71 1.71 1.68Fixed Asset Turnover Total Revenue / Net PPE 3.02 3.09 3.19 3.05 3.07 3.08 3.08 3.07
Financial Leverage RatiosDebt to Equity (Short Term + Long Term Debt) / Total Equity 270.9% 153.1% 565.4% 3335.9% 1177.3% 760.5% 576.5% 24.2%Equity Ratio Total Equity / Total Assets 11.97% 17.88% 6.15% 1% 3% 5% 6% 8%Debt Ratio (Short Term + Long Term Debt) / Total Assets 33.12% 30.02% 30.98% 34% 34% 34% 33% 33%Capitalization Ratio Total Debt / (Total Debt + Total Equity) 70.44% 62.57% 82.17% 97% 92% 88% 84% 80%
Profitability RatiosNet Profit Margin Net Income / Total Revenues 1.49% 7.89% 5.21% 5.30% 5.60% 5.76% 5.90% 6.48%ROA Net Income / Total Assets 2.08% 12.07% 8.71% 9.15% 9.58% 9.83% 10.07% 10.90%ROE Net Income / Total Equity 17.05% 67.39% 140.50% 819.75% 318.69% 214.81% 168.57% 136.01%Operating Margin Operating Income / Total Revenues 2.48% 12.69% 8.53% 8.50% 8.99% 9.24% 9.45% 10.30%
Payout Policy RatiosDividend Payout Ratio Dividend / Net Income 2.74 0.54 0.82 0.81 0.81 0.81 0.81 0.81 Total Payout (Dividends + Share Repurchases) / Net Income 465% 139% 167% 162% 83% 85% 85% 79%
Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending 121.591741473063 Leases Fiscal Years Ending 95.620924813462 Leases2015 323 2014 310 2013 3422016 257 2015 239 2014 2712017 210 2016 180 2015 2032018 150 2017 146 2016 1452019 90 2018 99 2017 118Thereafter 274 Thereafter 242 Thereafter 358Total Minimum Payments 1304 Total Minimum Payments 1216 Total Minimum Payments 1437Less: Interest 155 Less: Interest 142 Less: Interest 180PV of Minimum Payments 1149 PV of Minimum Payments 1074 PV of Minimum Payments 1257
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.90% Pre-Tax Cost of Debt 3.90% Pre-Tax Cost of Debt 3.90%Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 2.4 Number Years Implied by Year 6 Payment 3.0
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 323 310.9 1 310 298.4 1 342 329.22 257 238.1 2 239 221.4 2 271 251.03 210 187.2 3 180 160.5 3 203 181.04 150 128.7 4 146 125.3 4 145 124.45 90 74.3 5 99 81.8 5 118 97.46 & beyond 90 209.5 6 & beyond 99 187.2 6 & beyond 118 273.8PV of Minimum Payments 1148.7 PV of Minimum Payments 1074.4 PV of Minimum Payments 1256.8
Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009)
Operating Operating OperatingFiscal Years Ending Leases #REF! Leases #REF! Leases2012 329 2011 348 2010 3642013 257 2012 268 2011 2792014 192 2013 205 2012 2112015 140 2014 150 2013 1552016 97 2015 113 2014 113Thereafter 393 Thereafter 431 Thereafter 468Total Minimum Payments 1408 Total Minimum Payments 1515 Total Minimum Payments 1590Less: Interest 187 Less: Interest 202 Less: Interest 216PV of Minimum Payments 1221 PV of Minimum Payments 1313 PV of Minimum Payments 1374
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.90% Pre-Tax Cost of Debt 3.90% Pre-Tax Cost of Debt 3.90%Number Years Implied by Year 6 Payment 4.1 Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 4.1
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 329 316.6 1 348 334.9 1 364 350.32 257 238.1 2 268 248.2 2 279 258.43 192 171.2 3 205 182.8 3 211 188.14 140 120.1 4 150 128.7 4 155 133.05 97 80.1 5 113 93.3 5 113 93.36 & beyond 97 294.9 6 & beyond 113 324.9 6 & beyond 113 350.6PV of Minimum Payments 1221.0 PV of Minimum Payments 1312.8 PV of Minimum Payments 1373.8
Present Value of Operating Lease Obligations (2008) Present Value of Operating Lease Obligations (2007) Present Value of Operating Lease Obligations (2006)
Operating Operating OperatingFiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2009 344 2008 378 2007 4042010 288 2009 325 2008 3352011 217 2010 237 2009 2432012 147 2011 166 2010 1682013 109 2012 116 2011 119Thereafter 423 Thereafter 560 Thereafter 505Total Minimum Payments 1528 Total Minimum Payments 1782 Total Minimum Payments 1774Less: Interest 202 Less: Interest 253 Less: Interest 238PV of Minimum Payments 1326 PV of Minimum Payments 1529 PV of Minimum Payments 1536
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.90% Pre-Tax Cost of Debt 3.90% Pre-Tax Cost of Debt 3.90%Number Years Implied by Year 6 Payment 3.9 Number Years Implied by Year 6 Payment 4.8 Number Years Implied by Year 6 Payment 4.2
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 344 331.1 1 378 363.8 1 404 388.82 288 266.8 2 325 301.0 2 335 310.33 217 193.5 3 237 211.3 3 243 216.64 147 126.1 4 166 142.4 4 168 144.15 109 90.0 5 116 95.8 5 119 98.36 & beyond 109 318.4 6 & beyond 116 414.2 6 & beyond 119 377.6PV of Minimum Payments 1325.9 PV of Minimum Payments 1528.6 PV of Minimum Payments 1535.8
Present Value of Operating Lease Obligations (2005)
OperatingFiscal Years Ending Leases2006 4032007 3482008 2482009 1762010 126Thereafter 544Total Minimum Payments 1845Less: Interest 252PV of Minimum Payments 1593
Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.90%Number Years Implied by Year 6 Payment 4.3
Lease PV LeaseYear Commitment Payment1 403 387.92 348 322.43 248 221.14 176 151.05 126 104.16 & beyond 126 406.2PV of Minimum Payments 1592.6
Number of Options Outstanding (shares): 3,691Average Time to Maturity (years): 2.85Expected Annual Number of Options Exercised: 1,297
Current Average Strike Price: 75.08$ Cost of Equity: 6.76%Current Stock Price: $102.91
2015E 2016E 2017E 2018E 2019E (CV)Increase in Shares Outstanding: 591 1,650 1,059 132 132Average Strike Price: 81.17$ 75.32$ 72.05$ 61.52$ 61.52$ Increase in Common Stock Account: 47,971 124,272 76,301 8,121 8,121
Change in Treasury Stock 2,700 325 325 325 325Expected Price of Repurchased Shares: $102.91 109.86$ 117.28$ 125.21$ 133.66$ Number of Shares Repurchased: 26 3 3 3 2
Shares Outstanding (beginning of the year) 905,000 905,565 907,212 908,268 908,397Plus: Shares Issued Through ESOP 591 1,650 1,059 132 132Less: Shares Repurchased in Treasury 26 3 3 3 2 Shares Outstanding (end of the year) 905,565 907,212 908,268 908,397 908,527
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol UPSCurrent Stock Price $102.91Risk Free Rate 2.87%Current Dividend Yield 2.61%Annualized St. Dev. of Stock Returns 20.50%
Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 264 61.52 4.85 39.00$ 10,295$
Range 2 2,118 72.05 2.52 31.06$ 65,782$ Range 3 1,182 81.17 2.30 24.21$ 28,617$ Range 4 127 96.98 9.18 22.35$ 2,839$ Total 3,691 75.08$ 2.85 35.36$ 107,534$
107,534$
