I.

Introduction
FedEx and UPS are package-delivery companies that together provide supply chain,

transportation, logistics and related information services. FedEx has expanded from operating in 25
U.S. cities, to serving international markets. Similarly, UPS initially operated just within the U.S.
before expanding into Canada, Europe, Latin America and most recently, China. FedEx and UPS target
the same markets and compete for presence in them.
II.

Problem Definition
Given that June 2004, the Chinese air transportation market will become accessible to FedEx

and UPS, since a decision must be made about which company to invest in, what will be the greatest
consideration in investing on both companies? What is the signal from the market? How about
financial studies of both companies? Are those studies working?
III.

Recommendation or Course of Action

Comparing FedEx and UPSs non-financial data such as competitive strategies, and also

comparing their financial data, such as Return on Asset, Return on Equity, Weighted Average
Capital Cost, annual Economic Value Added, Market Value Added, Net profit Margin, Stock
Price, Dividend per share, and Annual return allows us to determine which one of them is the
company of excellence.
And relate the data to the facts to study which strategies work better in real world
situations.
IV.

What happened to FedEx and UPS's stock price in early 2004? Why did they rise?
Why did one outpace the other? In an efficient market, how are we to interpret
FedEx 14% increase in market value?

In the period of 2014, both FedEx and UPS stock prices had a significant increase that
started early in 2004.
The rise of both stocks seem to be following the air-transportation of U.S. and China
agreements reached in June 2004. We can see a positive reaction by the market for both companies in
their international growth, especially in China. FedEx stock prices outpaced UPS because FedEx had a
larger presence in China with its Chinese volumes nearly doubling from 2003 to 2004. FedExs share
price increased 5 times faster than UPSs while FedExs stock price rose 13.9%, and UPS only saw a
3.1% increase during this time. In an efficient market, this means that investors believe that future
opportunities in international business will drive long-term growth for FedEx over and above that of
UPS.
V.

Why didn't UPS create overnight delivery? How did FedEx get away with
successfully entering this market?
The only reason UPS did not create overnight delivery is because of their financially

conservative and high emphasis on lowering its cost. Overnight delivery is a high cost option.
FedEx was able to create a fleet because they invested a lot of capital in purchasing their own
planes at the beginning before entering the market. A late entry on acquiring new aircraft by
UPS might be a major factors of UPS high cost on planning overnight delivery.
VI.

What is going on in this industry? How are the two firms competing? What are the
competitive prospects for the foreseeable future?
The industry seems very competitive; however, the major competitive forces are only

FedEx and UPS. Therefore, the industry should be categorized as oligopoly. UPS and FedEx
feed off each other, and each is trying to beat the others service and promotions. For example,

each of them launched a website for package tracking around 1994. Recently, the strong
competitive prospect is focusing on the agreement that was reached between China and U.S.
VII.

How have UPS and FedEx performed financially? How do you measure financial
performance? What do the financial statements and ratios show? What does the
stock price performance tell you? How is EVA calculated? What does it reveal? Does
stock track historical EVA?
Financially speaking, FedEx passed UPS by maximizing their share price until the end of

1998. It is a turning point at 1998, FedEx close and sale their market shares in Europe which
significantly lower their revenues. Financial statements and ratios showed that UPS was more
excellent than FedEx. See Support section for detail comparison. The stock price showed a
very strong competitive of both companies, both of companies stock price ran on a similar
pattern.
EVA reflects the value created or destroyed each year by deducting a charge for capital
from the firm's net operating profit after taxes, and it calculated by subtract Capital Charge
from Operating Profits.
VIII.

This is a pretty depressing picture for FedEx: Tough industry fundamentals and big
negative EVA. Why hasn't its stock price fallen in absolute terms? How can we
rationalize the expectation that FedEx will preserve the value that it currently has?
There is a research conducted by Stern Stewart, EVA is a critical driver of a company's

stock performance. If EVA is positive but is expected to become less positive, it is not giving a
very good signal. Conversely, if a company suffers negative EVA but is expected to rise into a
positive territory, a good buying signal is given. And in the case of FedEx, even it had a big
negative EVA, market positively saw its potential and advantages in expansion at China

market. People need to accept that the financial data of FedEx was showing a high risk
investing policy by the company, and the expectation would be a great leading position like
FedEx had when first operated the overnight delivery.
IX.

If you had to vote for one of these two firms to enter the list of excellent companies,
which one would you chose?
Financial performance measures discussed reveal that UPS is superior, while the market

showed the most important non-financial measure of international growth potential is in favor of
FedEx. However, the greatest doubt would be FedExs historical achievement. In the past, FedEx had
entered new markets first and UPS has followed. When FedEx entered Europe, it was forced to
withdraw and suffered massive losses. On the other side, UPS approach in international markets had
resulted in lower growth than FedEx, while maintained highly positive EVA and MVA. The share price
response was due to FedExs ability to dominate the Chinese market first, for now investors believe that
future opportunities in international business will drive long-term growth for FedEx over and above
that of UPS. But I believe more to the effectiveness of management of UPS in creating value to the
company, while FedEx will likely encounter the same challenges that it faced in Europe. For these
reasons, I would choose UPS to enter the list of excellent companies.
X.

Support
Financial performance measures that can be obtained from a firms financial statements

consist of absolute data and financial ratios. Absolute measures such as income, net assets, and
equity, reveal trends and allow a company to be compared to its performance over time.
Financial ratios, including return-on-assets, and current ratio adjust for scale and allow for
comparisons of different-sized companies (Libby, et al., 2008).
Comparing FedEx and UPS financial data:

In the term of Return on Assets, a higher return means better the profit performance for
the company. UPS had a higher ROA in 2001 to 2003.

Return on Equity is the measurement of the rate of return on the ownership interest of the
common stock owners and firms efficiency at generating profits from every unit of
shareholders equity. UPS gained better ROE in 2001 to 2003.

Here is the WACC of both companies. An increase in WACC notes a decrease in

valuation and a higher risk. UPS had a lower WACC in 2001 to 2003.

In the term of Economic Value Added, a measure of a companys financial performance

based on the residual wealth calculated by deducting cost of capital from its operating profit.
UPS was also leading by gaining a higher EVA in 2001 to 2003.

Comparing Net Profit Margin of both companies which is a measurement of profitability,

UPS has a lower net profit margin which in the delivery industry means better cost
control.

Looking at the Stock price comparison of both companies, the price of stock for UPS was
higher than FedEx from 2001 to 2003.

Dividend per share of UPS is higher than FedEx.

Both FedEx and UPS had annual returns higher that Standard and Poors 500 index, but UPS had
a higher annual return compared to FedEx in 2001 to 2003.
Due to given financial data, UPS seems to have better performance than FedEx. All these
comparison analyses show the effectiveness of management in creating value to the company
which is strongly believed to be shown in stock price since UPS has $13.5 billion more in assets
and $11 billion more in revenues than FedEx. However, financial measures such as direct
inspection of the financial statements, financial ratios, earning per share, P/E ratios, and
economic profit (EVA) are strongly influenced by GAAP choices. An example of a disadvantage
of using financial statement information is the use of book values, not market values, which are
historic. As a result, the information is not as relevant, and inferences are not forward-looking. GAAP
decisions and estimates might incorporate management bias and error (Scott,2009).

Comparing FedEx and UPSs competitive strategies:

FedEX
Inventor of the HUB distribution system
Absolutely positively overnight ad
campaign
Expanding services, acquiring more trucks
and aircrafts
Raising capital

UPS
Expanded package delivery to every address
in the U.S.
Half-priced over-night letters
Aggressive acquisitions
Large investment in: Technology, Aircrafts,
Facilities

People-Service-Profit philosophy
JIT system
Technological innovations: Customer
Ordering, Package Tracking, Process
Monitoring
FedEx has more competitive advantages than UPS; FedEx is more innovated; FedEx has
purchased their own planes earlier; FedEx is largely free of Unions; FedEx has superior financial
return; FedEx is the expressed delivery leader. Compared to FedEx, UPS seems to have a
problem on their quality, union strikes, slow plodding, and late overnight market entry. However,
UPS has more financially conservative and long-term goal policy advantages compared to
FedEx.
Currently, the most critical non-financial measure is the international growth opportunities for
FedEx and UPS. With the landmark air-transportation agreement allowing for more foreign presence,
the company that can expand globally will control the developing markets. This will determine who
will take a larger share of the market, resulting in superior shareholder value.