Package Delivery Industry

• Delivery Products– Air– Ground

(Air has higher margins & lower volume than ground)

• Customer Segments– Individuals sending over-night letters– Small to medium sized enterprises demanding affordable

shipment of time critical packages– Large corporations moving heavy freight between facilities

Package Delivery Industry

51%

26%

17% 6%

Package Delivery Industry Analysis

Industry Trends:

• Consolidation

• Blurring lines between air and ground

• Increased competition between major competitors

• Other growth opportunities

UPS SWOT AnalysisStrengths

– Strong financial performance– Low risk – AAA rating– Technology leadership– Operational Advantage - Centralized air and

ground operations– Employee-owned structure, with very strong

loyalty and minimal conflicts of interest

UPS SWOT Analysis

Weaknesses– Unionized workforce – 58% of employees.

UPS are still able to maintain flexible work arrangements

– Not a strong presence in the air express market

UPS SWOT Analysis

Opportunities– Global growth – international exports and

intra country operations – E-commerce – Internet shopping growth– Supply chain management – “moving

conveyor belt” and logistics expertise– Faster delivery through via air

UPS SWOT AnalysisThreats

– Increasing competition between major players– USPS threatens UPS ground delivery margins

through future price competition– FedEx threatens UPS ground and international

delivery markets through consolidation and targeted segment competition

The Investment Decision

• Growth through acquisitions domestically or internationally

• Technology firms will be prime targets, as well as logistics and financial services firms

The Financing Decision

• Debt– Pros:

• Favorable terms, given AAA rating• Tax deductible interest• No dilution of ownership

– Cons:• Fixed claim to outsiders• Doesn’t give the comprehensive analyst

coverage and visibility enjoyed by FedEx

The Financing Decision• Sale and Lease Back

– Pros:• Tax shield• Improves B/Sheet (off-B/Sheet financing)• Improves liquidity ratios

– Cons:• Loss of control over assets• Reduction in net income from higher interest

payments makes future borrowing riskier, affecting ratings

• Opportunity cost of holding cash

The Financing Decision

• Operating Cash Flows– Pros:

• No dilution of ownership or fixed claim• Lowers opportunity cost of holding cash

– Cons:• Adversely affects liquidity ratios• Value of cash will decline over time• Lack of flexibility for future transactions• Limited operating cash flows

Why IPO?-- Objectives

– Tax efficient medium for future acquisitions, especially technology firms

– Enhanced visibility and market valuation paving the way for future equity issues

– Stock repurchase, giving shareowners greater value for their holdings

Why IPO?-- Rationale

• Currency for exchange in acquisitions

• Only 10% shares offered to public initially, hence minimal dilution of ownership

• High growth stage justifies equity issue

• Publicly traded stock will consolidate financial position as a AAA rated company

Financial analysis

Financial analysis

The premium on FedEx multiples need to be higher than average.

Lower Risk• Favorable Solvability• Low default probability

Increasing Profitability and Value Creation• Net Profit Margin 7%• ROE 24%• ROIC – WACC = 4%

Outperforming FedEx• Risk AAA vs. BBB rating• ROE 24% vs. 10%

Financial analysis

• Our ROE is higher by 136% on FedEx • using both average and highest premiums is conservative

Comparable multiples model valuation

Three stage model valuation

UPS IPO: Takeaways

• Considered multiple valuation models (market to book, PE multiples, DCF and 3-stage model)

• Average IPO price (market to book, PE, DCF, 3-stage)= $55.42

• IPO price should create enough demand in the market to build the ground for future issues