Global Shippers GDP Growth from Developing Nations & the Rise of E-Commerce Will Stimulate Demand for Courier & Delivery Services Introductions
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Global Shippers GDP Growth from Developing Nations & the Rise of E-Commerce will Stimulate Demand for Courier & Delivery Services Introductions Adam Potvin Nina Sysoeva Jordan Rai Marielle Colomb Analyst, Shipping & Logistics Analyst, UPS Analyst, FedEx Analyst, Deutsche Post • Worked as an Analyst Intern • Worked as a Junior • Worked as a Summer Intern • Worked at Crédit Agricole at Desjardins Capital Markets Accountant for GableCraft for Ernst & Young (French bank) • Worked as an Analyst Intern Homes • Case competitor for SFU JDC • French exchange student at Yellow Point Equity • Case competitor for SFU JDC West’s Accounting team Partners West’s Finance team Agenda 1. Industry Overview 2. UPS Analysis 3. FedEx Analysis 4. Deutsche Post Analysis 5. Final Rankings 6. Appendix Industry Overview Overview UPS FedEx Deutsche Post Global Shippers In a Nutshell Logistics companies provide delivery services of parcels, documents and packages by air, water, and land to customers, who are mostly businesses. Sophisticated distribution and information networks are required so that transportation and delivery is as efficient is possible. Global shippers often own or lease large aircraft and vehicle fleets. This industry does not include national post services, such as Canada Post, nor does it include commercial airlines. Source: IBIS World Overview UPS FedEx Deutsche Post Historical Performance: S5AIRFX (GICS—S&P 500) Trailing 12 Months Last Five Years Annualized Annualized Return: - 4.05% Return: 7.26% Last 10 Years Since Inception of Industry Classification (~27 Years) Annualized Annualized Return: 4.49% Return: 9.20% Source: Bloomberg; returns assume dividends reinvested into index Overview UPS FedEx Deutsche Post Current Industry Valuation & Performance Modest Multiples Reflect Modest Growth Expectations Industry Players Have Struggled 50% 40% 30% Dividend P/E P/Sales P/FCF P/Book EV/EBITDA Yield 20% 19.8x 0.8x 34.2x 9.1x 7.1x 2.10% 10% Deutsche Post 18.8x 0.5x 22.2x 2.6x 6.3x 3.55% 0% FedEx 14.3x 0.8x 62.5x 2.6x 5.5x 0.70% TNT Express 0.6x 1.9x -10% UPS 18.6x 1.6x 18.1x 36.4x 9.5x 3.08% -20% Yamato Holdings 27.3x 0.7x 1.7x 1.06% -30% -40% 2015-03-15 2015-06-15 2015-09-15 2015-12-15 2016-03-15 TNT Express UPS Yamato Holdings FedEx Deutsche Post Source: Bloomberg Note: Multiples are on a TTM basis, except EV/EBITDA which is on a forward 12M estimate Overview UPS FedEx Deutsche Post History of Logistics: 2700 B.C. – 700 A.D. • The Egyptians needed to transport the massive building blocks for the Great Pyramid of Giza. To do so, ~2700 B.C. they needed transport/hoisting equipment. Technology in material handling started at this point as multi-ton stones were transported and assembled on-site. • The Greeks developed rowing vessels, which greatly bolstered intercontinental trade. This would later ~300 B.C. benefit Greek armies led by Alexander the Great who needed to incorporate large and sophisticated logistics systems to travel (along with their weapons and families) as far as India. • The construction of the famous Mezquita Mosque in Spain required the use of procurement logistics to ~700 A.D ensure that pillars arrived in Spain in a timely manner. These pillars were sent from all around the Islamic Empire during the Umayyad dynasty. Source: DHL Website Overview UPS FedEx Deutsche Post History of Logistics: 1200 – 1800 • Hamburg, Germany was founded as a place to make sea travel more secure and as a node for shipment ~1200 of fur pelts and other business goods from other nations. Hamburg was a node within the Hanseatic League, which was an international network of trading partners. • The first postal service that operated under clearly defined transit times is developed. Letters were ~1500 delivered from Paris to Spain to Vienna. • The invention of vehicles, railroads, ships and the use of the steam engine meant that goods could be ~1800 transported faster and more efficiently than ever. This new economic era presented a world of opportunity in the realm of logistics Source: DHL Website Overview UPS FedEx Deutsche Post History of Logistics: 1940 – 1980 • Military logistics had been refined since WWI. During WWII, logistics was a vital link for troops to receive ~1940 their supplies, rations, weapons and equipment • The sea container is invented by Malcom McLean, which changed methods of productions and 1956 consumer habits. The sea container could be used to ship goods abroad which acted as a significant boon for international trade and helped create a more efficient and free market and brought about increased globalization. • Just-in-time logistics is introduced by Japan’s Toyota Motor Company. The purpose was to link logistics 1970-1980 to other functions of the operation, with an emphasis on procurement. Source: DHL Website Overview UPS FedEx Deutsche Post History of Logistics: 1990 – Present Day • Quick Response (QR) and Efficient Consumer Response (ECR) technologies are developed and applied ~1990 by retailers and wholesalers. Now, distribution centres are responsible for transporting goods instead of merely storing them. This means that companies can now better react to market fluctuations and act more nimbly. • Supply chain management has evolved to the point where it is now vital to the business processes Today that link the supplier to the vendor to the end user. Supply chain management is interactive and requires constant monitoring of competing objectives. • As globalization increases, using logistics to strengthen international supply chains has increasingly Today become a way for companies to distinguish themselves in a globally competitive environment. Source: DHL Website Overview UPS FedEx Deutsche Post Point-to-Point Model Point-to-Point Model • Was the dominant method of transportation for both the airline and logistics industries until the 1970s • The protocol is to ship from one node to another directly without needing to be rerouted • Due to the complexity of handling larger volumes and the inefficient nature of transporting goods on half-empty planes, this delivery model has fallen out of favour for large logistics companies • Today, this method is primarily used by smaller logistics companies and budget airliners that handle smaller volumes with fewer nodes to consider • The point-to-point concept is used in a variety of different contexts, including in telecommunications and in computer networking (i.e. peer-to-peer file sharing) Source: DHL & Southwest Airlines Websites Overview UPS FedEx Deutsche Post Hub and Spoke Model Hub and Spoke Model • In 1955, Delta Air Lines pioneered the hub and spoke model • When the airline industry was deregulated in 1978, this model became common practice in the airline industry • FedEx would be the first logistics company to adopt this model in the mid 1970s • The protocol is to ship goods from all nodes to a central location (hub) where the goods are re-sorted and then shipped to its destination • Hubs can vary in scale; there can be regional hubs and a central global hub—this is done by UPS for instance • Is the dominant method of transporting goods used today by most large logistics companies due to the efficiency of the model • Companies in other industries have also implemented the model, including Lowe’s and Wal-Mart Source: DHL Website Overview UPS FedEx Deutsche Post Point-to-Point Versus Hub and Spoke Point-to-Point Advantages Disadvantages Reduces travel time between nodes X There is a limit to the number of nodes that can be adequately and Reduces risk of lost shipments efficiently connected Fuel (and subsequent greenhouse gas emissions) is lower per unit X Has been proven to be a costlier method of transportation for larger shipped logistics companies due to greater overall travel leading to higher total fuel costs and the need for goods to be sorted at each node, leading to higher labour costs Hub and Spoke Advantages Disadvantages Company can concentrate and downsize its workforce by having goods X Any disruption at the hub can cause delays throughout the entire sorted at one central location instead of multiple locations—this system reduces labour costs X Efficiency of model depends on the capacity of the hub Ensures that flights or vehicle trips are at or near capacity when X Route scheduling may be complicated delivering goods, ensuring greater efficiency and reduced fuel costs X Requires longer journeys for goods to arrive at their destination Spokes can easily be created within the model Sources: Global Logistics: Mangan, Lalwani & Butcher; Aviation Knowledge Overview UPS FedEx Deutsche Post Market Segments Who Uses Courier & Delivery Services? 1. Business services Used primarily by bankers, bureaucrats and lawyers, this market segment relies on speedy and reliable B2B service for time-sensitive package delivery. This market segment has risen in importance since the latest financial recession as business spending increases. 2. Retailers and wholesalers This market segment includes businesses in various sectors including consumer goods, fashion and electronics. A retailer/wholesaler would use a courier to transport raw materials between business locations, for instance. Amazon has contributed a large share of revenue for this segment, as it uses FedEx and UPS for a majority of shipments. 3. Households Self-employed individuals may use couriers to delivery various packages. Due to the rise in popularity of e-commerce, individuals/households are increasingly likely to use courier services to trade items in the years to come. 4. Other This includes third-party logistics and supply chain management companies that are excluded from the business services segment. Source: IBIS World Overview UPS FedEx Deutsche Post Geographical Markets Where do Courier Service Companies Make Their Revenue? 1. North America Home to the two biggest names in the industry, UPS & FedEx, the U.S. market accounts for 90% of North American revenue and is mainly focused around the express segment.