UNIVERSITY OF FINANCE AND ADMINISTRATION
Faculty of Economic Studies
Field of Study: Business Management and Corporate
Finance
Anzhela Lomonosova
Specifics of Financial Analysis in Large Multinational
Corporations.
Prague 2019
Final Thesis Supervisor:
Ing. Kateřina Kalinová
Acknowledgments
I would like to express my special thanks of gratitude to my Supervisor, Ing. Katerina Kalinova, for the patience, invaluably constructive criticism and great contribution to my Bachelor Thesis. Secondly, I would also like to thank my professor Ing. Eva Kostikov. I am extremely grateful to her for sharing the experience and the knowledge of the financial analysis, as well as advising me at the beginning of the research process. Finally, I would also like to thank my parents and friends who helped me a lot in finalizing this project within the limited time frame.
Declaration
I hereby declare that I have compiled this final thesis on my own and all the quoted literature, as well as other sources used in the thesis, are listed in the bibliography. The electronic copy of the thesis is identical with the hard-bound copy. I approve that this diploma thesis is published pursuant to Section 47b Act No.111/1998 Coll., on Higher Education and on the amendment and modification of other acts (the Higher Education Act), as amended.
29/4/2019 ______
Abstracts
The purpose of the bachelor thesis is to analyze the financial health of two logistical giants; UPS and FedEx. Annual report principles are introduced in the theory, followed by rules and methods of analyzing the balance sheet, income statement and cash flow statement. A company overview is taken into account before a ratio and DuPont analysis based on methodology is carried out to establish existant trends in the last 5 fiscal years by UPS and FedEx, subsequently compared to industry averages for the given year. Dividend yield, credit rating and analyst growth predictions are considered and discussed. SWOT analysis is carried out to further support the results of the financial analysis and connections are identified and discussed in order to contribute to the evaluation of the financial health of UPS and FedEx.
Keywords
Activity, annual report, balance, cash flow, comparison, DuPont, FedEx, financial analysis, horizontal, income, inter-company, intra-company, liquidity, profitability, ratio, solvency, SWOT, UPS, vertical.
Table of Contents
Acknowledgments ...... 2 Declaration ...... 3 Introduction ...... 8 1. Company Annual Report ...... 11 1.1 Financial Statements ...... 11 1.2 Balance Sheet ...... 12 1.3 Income Statement ...... 13 1.4 Cash Flow Statement ...... 14 2. Financial Analysis Techniques ...... 16 2.1 Comparative Analysis ...... 16 2.2 Horizontal Analysis ...... 16 2.3 Vertical Analysis ...... 17 2.4 Activity and Ratio Analysis ...... 18 2.5 DuPont Analysis...... 23 2.6 Dividend Yield ...... 24 3. SWOT Analysis ...... 25 3.1 Strengths and weaknesses ...... 26 3.2 Opportunities and Threats ...... 27 4. Company Overview ...... 28 4.1 FedEx ...... 28 4.2 UPS ...... 28 5. Financial Analysis and DuPont Analysis ...... 30 5.1 Profitability ...... 30 5.2 Solvency ...... 32 5.3 Activity ...... 33 5.4 DuPont Analysis...... 35 6. Stock analysis ...... 36 6.1 Dividend Yield ...... 36 6.2 Retention Rates ...... 38 6.3 Credit Rating ...... 39 6.4 Annual Growth Comparison ...... 40 7. SWOT Analysis FedEx ...... 42
7.1 Strengths ...... 42 7.2 Weaknesses ...... 43 7.3 Threats ...... 43 7.4 Opportunities ...... 43 7.5 SWOT Evaluation ...... 44 8. SWOT Analysis UPS ...... 45 8.1 Strengths ...... 45 8.2 Weaknesses ...... 45 8.3 Threats ...... 46 8.4 Opportunities ...... 46 8.5 SWOT Evaluation ...... 47 Conclusion ...... 48 Bibliography ...... 51 Index of Appendices ...... Chyba! Záložka není definována.
Introduction
This Bachelor Thesis (BT) explores the financial tools and techniques, used to analyze the financial strengths and weaknesses, establishing relationships between the elements of the balance sheets, income, and cash flow statements. A wide variety of analytical techniques can allow us to discover financial implications as well as economic trade-offs. Through the use of key performance indicators, coincided with an adequate interpretation of the balance sheets and income statements; the efficiency, liquidity, and profitability of the company can be discovered. “Selecting the appropriate tools from these choices is clearly an important part of the analytical task. Yet, experience has shown again and again that first developing a proper perspective for the problem or issue is just as important as the choice of the tools themselves.” (Helfert, 2009)
All companies have a need for this practice, whether it be to assess the current financial situation of a company or to make business forecasts for the next fiscal year, to set goals and evaluate the company’s progress and achievements, that will, in turn, affect the decision making within the company.
The topic of this thesis is the financial analysis of companies in the same industry and comparison of the results two logistical giants; UPS and FedEx. The aim of this thesis to test the applicability of different financial analyses and assess the financial health of these companies. As both companies are based in the US, different accounting rules in comparison to Europe are in place (such as financial accounting standards board rules issued by US government exchange commission) and are introduced within the methodology of this thesis. Literary research will be used primarily for a theoretical basis. Financial data obtained is from the official company investors webpage available online.
The objectives of this thesis are:
• Discover different financial analysis techniques. • Application of inter-company and intra-company analysis. • Assessment of financial health of the companies UPS and FedEx.
8 • Comparison of results to the industry and between the companies investigated. • Determine the dominating company based on economic factors. • Analyze the companies credit rating. • Assess forecasts performed by financial analysts in the field. • Suggest improvements based on financial results and SWOT evaluation.
In order to achieve these objectives, the following literature has contributed to the methodology of this thesis. “Financial reporting handbook” by CAANZ 2019 is used to understand accounting practices within a company for their financial reports. “Financial Analysis: A Business decision guide” by Steven Mark 2017 is a useful guide for working with the financial ratios, stating use of ratios and how to obtain them. “International financial statement analysis” by Thomas Robinson 2015 contributed to the application of the methodology in the practical part of the thesis where the financial statement was analyzed in depth.
This work will be divided into two parts;
Theoretical Part - Based on a literary review describing different financial techniques for the assessment of income statement, balance sheet, and cash flow statement. Financial ratios and activity ratios will be derived through the use of formulas that are to be used in the practical part with official financial reports of UPS and FedEx.
Practical Part – Financial analysis from the methodology will be utilized to assess financial health. Profitability, solvency and activity ratios will be derived for use as economic indicators, DuPont analysis will be performed and dividend yields will be calculated in order to compare UPS and FedEx to each other with their credit ratings examined, as well as compared to the industry averages, in order to identify trends and causes of decrease or increase in ratios from the end of the year 2014 up to last fiscal year report available from the end of the year 2018. Connections between characteristics of the company through SWOT and financial analysis will be discussed.
9
10 1. Company Annual Report
Each year, companies must produce a comprehensive annual report, including the activities that the company has carried out. It is compiled at the end of the accounting year set by the company, generally on the first day of the given month. Most jurisdictions enforce this practice by law, some require for the annual reports to be disclosed to the public also. This practice is, in general, are favored by companies that are looking for investors, as these reports are intended for shareholders and others interested, to track a company’s financial performance. If one desires to carry out financial analysis on any company, these reports must be available to them, specifically the financial statements section of the annual report. (CAANZ, 2019)
1.1 Financial Statements
These statements allow analysts or manager in charge to track the financial condition and the target results set by the business as well as cash flow patterns. Consisting of formal data, compiled to the generally accepted accounting principles (GAAP) subjected by the government's exchange commission following the rules of Financial Accounting Standards Board (FASB), these financial statements are considered reliable and are not tampered with in any way. Cumulative effects of all past decisions are reflected, thus it is important to understand the coverage and limitations of financial statements in order to carry out a specific analysis. Financial statements are governed by rules aimed to make the statements consistent and contain fair accounting between all companies. These rules are as follows: • Transactions are recorded at values prevailing at the time. • Adjustments to recorded values are made only if values decline. • Revenues and costs are recognized when committed to, not when cash actually changes hands. • Periodic matching of revenues and costs is achieved via accruals, deferrals, and accounting allocations.
11 • Allowances for negative contingencies are required in the form of estimates that reduce both profits and recorded value, usually affecting shareholders’ equity or special set-asides.
(Helfert, 2009)
These rules can be considered to be ambiguous, leaving the analyst to interpret how is the economic performance to determine shareholder value results.
1.2 Balance Sheet
A balance sheet is static, prepared as of a specific date , acting as a snapshot into the company’s assets and liabilities as of that date. It is a statement of financial position and must always balance. All assets are listed first, in the order of ease cash conversion (liquidity), followed by liabilities. Categories of assets include: • Current assets: Cash, investment in stock, accounts receivable, inventory (assets that are regularly turned over in a short period of time). • Fixed Assets: Buildings, forms of transport company owns, land (assets used over a long period). • Other assets: Various intangibles, deposits, and rights to patents. Categories of liabilities include: • Current liabilities: Short term debt (less than one year), obligations to government authorities (taxes for example) and stock providers. • Long term liabilities: Debt available to be repaid beyond one year period, such as loans, mortgages, and bonds. • Shareholders equity: Retained earnings after payments of dividends. Funds contributed by other “owners” of the business. (Hoyle and Skender, n.d.) Following stated financial statement rules listed in chapter 1.1, it is important to take note that although the balance sheet is static, all the revenue stated applies to the specific date balance sheet is tailored to, however, liabilities
12 have been assimilated over the course of a much longer period. Hoyle and Skender (n.d.) make an account on that it is important to take note that some assets may devalue over time, such as any vehicles, property or machines. If there are any raw minerals involved this may be affected over time as well as changes in the value of the currency may distort the accuracy of a balance sheet over time.
1.3 Income Statement
An Income Statement is the profit and loss statement, influenced by the management decision making resulting in money gained or lost over a specified time frame . Whether money is gained or lost, reflects the owner’s equity within the balance sheet. The income statement must come hand in hand with a balance sheet to explain the change in equity for the owners. Expenses must also be included, taxes and write-offs must be a part of the income statement. The income statement includes: • Sales (Specified cash or credit). • Purchases (Either of product or service). • Expenses of administration. • Marketing expenses. • Development expenses. Accrual accounting is most important in an income statement, as the businesses accountants must math relevant gains in revenue to relevant cost and expense during the period. Important elements that must be considered: • Income payments from any payments made in advance or that were delayed. • Depreciation of assets. • Any goods that were sold left over from the previous period. • General expense allocation during that specific time frame.
(Hoyle and Skender, n.d.)
13 1.4 Cash Flow Statement
Helfert (2009) suggests analyzing the balance sheet and the income statement together is better than separately. Any changes that the management makes not only affects the profit, as assets and liabilities are affected as well. Certainly, working capital, receivables and current payables are what analysts may be interested in. A cash flow statement shows the results from operational tactics as well as the balance sheet results.
It is prepared by comparing the beginning and end balance using elements from the income statement for that period. All interpreted in sources of cash and uses:
• Cash generated by profitable operations or drained by unprofitable results. • The cash impact of changes in working capital requirements. • Commitments of cash to invest in assets or to repay liabilities. • Raising of cash through additional borrowing or by reducing asset investments • The cash impact of the issuance of new shares or repurchase of shares. • The cash impact of dividends paid • Adjustments for accounting allocations, write-offs, and other noncash elements in the income statement and the balance sheets. • The net impact of the period’s cash movements on the company’s cash balance.
(Helfert, 2009)
Helfert (2009) mentions that a cash flow statement is important in that the quality of operational strategies can be accessed, as well as its effectiveness. It is important for a business to see if the business can fund their projects and needs through operational strategies as it eliminates the need for potential loans, which would further increase the liabilities. Although write-offs from a cash flow perspective are just a simple bookkeeping entry as there is no cash involved. In fact, the assets amortized by the bookkeeping is cash committed to already past
14 time frame, meaning although they reduced net profit, it must be added back as positive cash flow, this allows us to see cash generated solely by operations before the write-off was made.
Cash flow can be an important indicator for investors as well as analyzed by credit rating companies, as share buybacks and dividends paid are monitored whether a company is able to pay dividends out of their earnings or the company must acquire debt in order to pay their shareholders. This may lower the companies credit rating due to inability to pay out their dividends or buy back shares in order to offset dilution.
15 2. Financial Analysis Techniques
2.1 Comparative Analysis
Since a financial statement is reflecting the financial position of a given time, knowing simply, for example, that the net income resulted in 50 million dollars may not be that useful if you are evaluating the company’s financial health or performance. Hence it is best to compare one financial data with another. More common techniques include intra-company and inter-company comparative analysis.
• Intra-company: Used to analyze within the same company the financial relationship of a particular element within a year with the same element on a different year. This is used to interpret changes and noticing trends. • Inter-company: Comparing a particular element within a company, with the same element of another competitive company. This is used to compare companies to each other establish which has a competitive advantage.
(Wild 2008, 540)
2.2 Horizontal Analysis
Used in inter-company and intra-company analysis, horizontal analysis is also known as trend analysis, it helps investigate changes of a particular element within a financial statement over a given time from which you may evaluate if there is an increase or decrease within the trend of that element. It is highly useful because it is very straightforward and may be expressed in percentages (inter- company analysis can state changes in numerical values), however, no computing to percentages can be done if there is no value assigned to an element in a sequence of years.
The horizontal analysis may show growth patterns and establish seasonality. By looking at the income statement, balance sheet and cash flow
16 statement operational results can be evaluated as any changes in operational techniques may lead to consequences and if they can be represented in percentage increase or decrease the company managers may correct and alter their operations to boost efficiency.
The disadvantages of horizontal analysis are highlighted depending on which accounting period the analyst starts from and the time frame that is chosen. This may skew the results to look good or bad. An example would be to compare currents period to last years to show good results but in comparison to the preceding year, they may actually show that the profits are not meeting expectations.
Example:
Year 1 Year 2 % Growth
Net income $20,000,000 $40,000,000 100
Retained Earnings $100,000,000 $104,000,000 4
Table 1 Source: Author
(this example is not based on a real-life example and is made solely for this thesis) .
2.3 Vertical Analysis
Vertical analysis is useful in the analysis of a single financial statement as the changes also may be expressed as a percentage of the total amount. It is mainly used for interpreting the cost of goods sold in comparison to the sales that were made during that financial year but can be used for any number of financial statements. It is especially useful for inter-company analysis as you can compare businesses of different sizes as the values are expressed as percentages rather than numbers. For example, percentage wise a smaller business may be dealing with smaller numbers on their financial statements but percentage wise they have a higher turnover than a larger company they are competing with, this may show
17 investors that it, although having a less net income, are more successful based on relative performance. (Hermanson, Edwards and Salmonson 1989, 786)
Example:
$ %
Sales 10,000,000 100
Cost of goods sold 2,000,000 20
Gross profit 8,000,000 80
Administrative expenses 4,000,000 40
Operation Income 4,000,000 40
Tax (25%) 100,000 10
Net income 3,000,000 30
Table 2 Source: Author
(this example is not based on a real-life example and is made solely for this thesis).
2.4 Activity and Ratio Analysis
Edmonds (2006) claims that the most widely used financial tool is the ratio analysis, as it can uncover underlying problems a business may be experiencing. This type of analysis is orientated for the future rather than analyzing the past, uncovering trends difficult to identify it remains as one of the widely used and useful tools. A ratio expresses the relationship between two quantities as may be expressed as a rate between the two quantities as well as percentage and proportion. The ratio analysis is used to determine a company’s liquidity, profitability, and solvency using different formulas.
Liquidity : Short term debt payability of a company is important. This is used primarily for suppliers and bankers to access the liquidity. Most ratios used are current, quick, cash, inventory turnover and receivables turnover.
18 The current ratio shows current working capital positions, what assets does the company possess to pay short term obligations. Calculated by the following formula:
Formula 1
(Hermanson, Edwards and Salmonson 1989, 786)
Quick ratio assesses how quickly a company can pay an immediate debt as only cash, current marketable securities and receivables are included in the numerator of the equation. Inventories and pre-paid expenses are ignored as their liquidity is low as it may take several months to liquidate and turn into actual cash receipts.
Formula 2
(Edmonds et al. 2006, 538)
Short term activity: Inventory turnover shows the average time of the whole production cycle during a given time period. Measuring the liquidity of inventory is calculated by dividing the costs of goods sold by the average inventory. In some cases, the seasonal effect may be significant, otherwise beginning and ending inventory balances are used.
Formula 3
(Weygandt, Keiso and Kimmel 2001, 689)
19 Receivables turnover measures how quickly can receivables be converted into cash receipts. Therefore, this formula primarily measures how many times are the account receivables collected over a certain time frame. The formula is as follows:
Formula 4
(Weygandt, Keiso and Kimmel 2001, 689)
Working capital turnover represents how efficiently the company is able to use its short term assets and liabilities to support its sales. A high ratio would represent the company being very efficient at using its capital to generate profit, a low ratio could suggest the business is using accounts receivable and its inventory that could, in turn, lead to bad debt of unused inventory which could deteriorate and lead to loss of revenue. To calculate the working capital one must minus current liabilities from current assets during the same 12 month period if used for that fiscal year. The formula is as follows:
Formula 5
(Weygandt, Keiso and Kimmel 2001, 689)
It is good to compare this ratio to the industry average and compare with other companies within the same industry and look at change over time.
Solvency: Primarily for stockholders, it presents the company´s ability to pay long term debt along with its interests and repaying debts maturity. Most common ratios used for solvency are a debt to total assets, times interest earned and debt to equity.
Debt to total assets ratio represents the relation of total company´s assets to the assets which are financed by debt. It is thus calculated by the following formula:
20
Formula 6
(Weygandt, Keiso and Kimmel 2002, 690)
Time interest earned represents the ability of the company to meet the interest payment targets. By dividing the earnings before any expenses such as taxes and by interest expense we get the following formula:
Formula 7
(Weygandt, Keiso and Kimmel 2002, 690)
Debt to total equity represents the relation between owner financing and creditor financing within the company. To summarise, it is the equity and debt being used to sustain their assets. It is thus calculated by the following formula:
Formula 8
(Weygandt, Keiso and Kimmel 2002, 690)
Profitability : These ratios investigate the success of a given company´s operations that are responsible for the increase in income. Hence income affects how quickly the company will obtain debt and equity financing, it affects the liquidity and growth of the company. Profitability is important for the creditors as well as investors being one of the final tests for management operating effectiveness.
Most used profitability ratios are: net income margin, return on equity and return on assets.
21 Net income margin, also known as profit margin follows the formula of dividing net income by net sales. This is demonstrating how effective the business is at turning sales into profit and thus is often expressed as a percentage. If the profit margin is low then there may be problems with controlling the costs of production or that there are not enough sales.
Formula 9
(Edmonds et al. 2006, 544)
Return on equity is used to calculate how profitable is the investment for the shareholders. It is thus calculated by the following formula:
Formula 10
(Edmonds et al. 2006, 544)
Return on assets is the coloration between the wealth generated from the amount invested, the higher the return the better the investment and the company´s performance. Thus the following can be calculated using the formula:
Formula 11
(Edmonds et al. 2006, 544)
Return on capital employed (ROCE) is considered an important profitability ratio as investors may be interested in in this ratio for possibly good investment candidates. It is different to return on equity in the sense that it also takes into consideration debt and other liabilities. Adjustments may be needed as a high level of liabilities could artificially make a company look as though it has less
22 capital employed, and thus it is best to check if the company has high current liabilities in comparison to the companies total assets.
In order to calculate the capital employed, one must minus current liabilities from total assets. The following formula can thus be derived:
Formula 11
(Edmonds et al. 2006, 544)
2.5 DuPont Analysis
DuPont analysis helps to identify which factors affect the return on equity the most. Financial leverage along with operating and asset use efficiency all contribute to return on equity. Net income divided by revenue represents operating efficiency. Asset turnover ratio is reflected in the asset use efficiency. Assets divided by average equity represents the financial leverage. Thus the following formula may be introduced for the DuPont Analysis:
. . . .
Formula 11
(Parker, 2007)
Investors tend to use DuPont to calculate which company is better worth investing, as it assures a sustainable improvement through time and returns on equity. Company managers use DuPont analysis to assess why there are changes in the return of equity in order to eliminate flaws in management and raise the effectiveness of its operations. It is done by calculating changes in the components of the formula to isolate which change caused the largest impact on return on equity. (Parker, 2007)
23 2.6 Dividend Yield
Dividend yield and dividend per share can be an economical factor reflecting a companies financial health. A company may have a history of paying dividends every year and this policy can be ingrained into the company, thus continuing to do so unless there are critical times. This can be flawed as the company may be performing worse compared to past years yet still paying out their dividends without lowering them. A stable company can increase their dividend however questions may arise as to how they are able to do it as companies may borrow money (therefore increasing their liabilities) in order to pay out their dividends to their shareholders. Share sales may impact an increase in their dividend as well as increased profit. If a company lowers its dividend it could be due to a new venture, planning an acquisition of another company or a lower income during that fiscal year. The expectation is that seasonally the dividends will be adjusted to coincide with the earnings that year, however that may not always be the case. A high dividend may indicate that the company cannot come up with a good way to use that free cash and are not planning to innovate, a low dividend may indicate that the company is planning to grow and thus result in a higher share growth and may not be a bad indicator.
The following formula can thus be derived for dividend yield:
%
Formula 12 (Parker, 2007)
24 3. SWOT Analysis
In order to have good strategic planning within its organization, SWOT analysis is an effective tool with its own advantages and disadvantages. Companies have different sub-systems that react to their respective environments within the market, internally and externally. By analyzing these environments a strategic plan may be created.
Internal Factors:
• Strengths • Weaknesses
External Factors:
• Opportunities • Threats
“SWOT Analysis is a simple but powerful tool for sizing up an organization’s resource capabilities and deficiencies, its market opportunities, and the external threats to its future” (Thompson et al., 2007: 97).
Strategic Management Process can be demonstrated by the figure below:
→ → → & →
Figure 1, Source: Author
The aim of using SWOT analysis is to gain a competitive advantage, by creating a strategic plan and using the strengths alongside opportunities (connecting internal factors with external factors) and helping to eliminate weaknesses that could be detrimental with threats the organization may be
25 facing, this would set them apart from competitors and help the company gain an advantage.
See Appendix A to see Framework for SWOT Analysis by Wright (1992).
3.1 Strengths and weaknesses
It is important to note that all strengths must add value to the organization that sets it apart from its competitors. It is a positive and favorable characteristic of a company. It may be a resource, characteristic, skill or other a different advantage relative to its competitors, even such advantages as company image, relations with company suppliers are suitable strengths to consider. (Pearce and Robinson, 1991: 182). It is important for the company to know and weigh their possibilities and competency to solve certain types of issues before going forth to eliminate them. By knowing your advantages, it is easier for the company to grasp opportunities that the external environment may provide.
Weaknesses are assessed relative to competitors also; it reflects the company not having the form or competency to accomplish something specific. It is a negative characteristic and is unfavorable for the company. By knowing the weaknesses of an organization it is essentially the understanding in which activities and operations are the organization weaker relative to its competitors. Thus, one would know which changes in the environment pose a risk as the company would not be able to adapt in time. It is just as important for the company to know its weaknesses as it is important to know its strengths, as weaknesses may lead to drops in efficiency which may lead to financial losses and cause limitations as well as difficulties, foreseeing this and working to improve on the weaknesses is an essential part of a good competitive strategy (Thompson and Strickland, 1989: 109).
See Appendix B see Strengths and Weaknesses Checklist by Power (1986).
26
3.2 Opportunities and Threats
Opportunity is a certain condition within the environment that opens up a certain activity. It is a favorable characteristic for the company as the environment presented a situation that would enable the company to achieve its goals, thus an opportunity will always yield a positive result if the company takes advantage of it. The conditions that the opportunity creates utilizes the company’s strengths and allows the company to overcome potential threats and the company’s weaknesses. (Harrison and St. John, 2004: 164)
The threat is a condition that would sabotage a certain activity for the company. Thus it is a negative characteristic as it blocks the possibility to achieve organizational goals. Furthermore, it would also pose a risk for the company to remain on the market and even shut the company down as the company loses its competitive advantage (Ülgen and Mirze, 2010).
It is important to understand that opportunities and threats are largely out of control of the company, thus labeled as “external” factors. Thus companies must concentrate on their internal factors in order to be more adaptable to changes in the market and maintain a safe position. In some cases, opportunities and threats can be foreseen and be prepared for. (David, 2003: 10-11)
27
4. Company Overview
4.1 FedEx
FedEx Corporation is one of the leading private courier delivery service company, its rivals primarily being DHL and UPS. The company largely obtained success through maintaining a competitive advantage in numerous fields, as well as their successful acquisitions of other, smaller companies, that would pose a competitive risk to themselves. Their latest acquisition happened on May 26 th, 2016, where they acquired TNT Express for 4.4 billion euros to increase their outreach in Europe. Other famous acquisitions by FedEx include American Freightways Corp.,
ANC Holdings Limited as well as GENCO (About FedEx, 2019).
Having generated a revenue of $65.5 billion in 2018, it operates under $4.26 billion with a total net income of $4.57 billion. Total assets as of the end of the fourth quarter fiscal 2018, are worth $52.33 billion with $9.63 billion as total equity (Investors.fedex.com, 2019). FedEx during its early development was focused on operating within American territory but as of now, it covers 220 countries worldwide as well as employing 425,000 people. (About FedEx, 2019).
4.2 UPS
UPS is the largest package delivery company in the world, founded in 1907, it is the oldest US-based private package delivery company which gave it a head start in globalization and development. Rival companies such as FedEx and DHL may not compete in direct revenue comparisons, however, efficiency may be investigated. UPS boasts a high number of technological awards, the latest being “Georgia CIO: CIO of the Year, Super Global category – Juan Perez (2018)” and “Red Hat Innovator of the Year for Innovative Use of Open-Source Software, 2018”, demonstrating their investments into computer technologies to manage their logistical chain and global operations. (Ups.com, 2019)
28 Finishing 2018 with a revenue of $71.9 billion dollars, total net income accumulated to be $4.80 billion. Total assets worth $50 billion, UPS equity as of 2018 is at $15.72 billion. The company employs 481,000 people and delivers to 220 countries as its main competitors (Investors.ups.com, 2019).
29 5. Financial Analysis and DuPont Analysis
Through the use of the theoretical part of this thesis, Annual Report for the Fiscal Year 2018 was analyzed for ratios and trends, in calculations including the last 5 years. (Appendix D, Appendix E, Appendix F, Appendix G, Appendix H, Appendix I, Appendix J (UPS, 2019), Appendix K, Appendix L, Appendix M, Appendix N, Appendix O, Appendix P (Investors.fedex.com, 2019). Industry averages have been taken into account for comparison. (Stock Analysis on Net, 2019).
5.1 Profitability
UPS FedEx
2018 2017 2016 2015 2014 2018 2017 2016 2015 2014
Net profit margin 6.67% 7.45% 5.63% 8.30% 5.21% 6.99% 4.97% 3.61% 2.21% 4.60%
Industry 6.94% 7.55% 8.82% 7.36% 9.90% 6.94% 7.55% 8.82% 7.36% 9.90%
Return on Equity 159% 491% 847% 196.% 142% 23.5% 18.6% 13.2% 7.00% 13.7%
Industry 22.7% 21.2% 24.0% 17.80% 21.32% 22.77% 21.24% 24.02% 17.80% 21.32%
Return on Assets 9.58% 10.81% 8.50% 12.64% 8.55% 8.74% 6.17% 3.95% 2.83% 6.34%
Industry 4.68% 4.77% 5.51% 4.25% 5.29% 4.68% 4.77% 5.51% 4.25% 5.29% Return on Capital 18.4% 23.2% 19.3% 27.8% 18.6% 11.5% 12.5% 8.1% 6.0% 12.4% Employed
Industry 9.9% - - - - 9.9% - - - -
Table 3, Source: (Stock Analysis on Net, 2019).
UPS has had the lead from 2014 up to 2017 for each consecutive year of the net profit margin, demonstrating better ability to turn sales into profit, FedEx took the lead in the year 2018 (at 6.99%, greater than UPS 6.67%). Observing the differences between UPS and FedEx is that although FedEx had lower net profit margin compared to UPS for 4 consecutive years, it had a steady climb after the drop between the year 2014 and 2015, and has been closing the gap with its competitor FedEx successfully. UPS had increases and decreases depending on the year, proving less stable climb as UPS net profit margin has dropped (-11%) between 2017 and 2018. Although FedEx has been below industry average since the year 2014, in 2018 it has successfully surpassed UPS net profit margin as well
30 as the industry average despite having a significant difference with the industry average in the previous years.
Shareholders may be interested in the high return on equity of UPS (at 158.59%, compared to 23.55% at the end of the year 2018), as it suggests investing in UPS is more profitable than FedEx, however, return on equity being this high is an anomaly and cannot be directly compared to the return on equity of FedEx. Such a high value is present due to accounting practices of UPS in their equity calculation and high leverage profile generating an anomalous value. FedEx had an increase in return on equity between 2017 and 2018 (by 26%) due to increase in profitability by return on assets (from 6.17% to 8.74%) due to an increase by 41% between 2017 and 2018 of net profit margin. Similarly to net profit margin trend, FedEx was falling short with the rest of the industry every consequent year since the year 2014, having surpassed the industry average only at the end of the year 2018 despite being significantly below the industry average in the previous years.
Return on Assets for UPS has an unstable trend between rising and falling every alternating year, FedEx similarly to net profit margin has a steady increase each consecutive year after a fall between the year 2014 and 2015. Although UPS has a higher return on asset (at 9.58% compared to 8.74% by FedEx), FedEx having a steady increase could indicate a better company’s performance, showing more reliability and predictability compared to UPS.
UPS has been closer to the industry average since 2014 compared to FedEx, both experiencing a significant fall below average between 2014 and 2015, UPS overall deems to be more profitable due to a higher return on assets but falls behind the industry in the year 2018 with FedEx taking the lead. Due to the high market power of the companies being logistical giants within its industry, the return on assets is well above the industry average and stays competitive between the two companies.
Return on capital employed for both companies is meaningfully better than the reported industry average of 9.9% with UPS generating almost double the
31 average (18.4%), with FedEx generating 11.5%, significantly behind UPS. Both companies performing better than the average industry is a positive sign as it suggests that the capital is being used more efficiently than similar companies. It is important to note that the return on capital employed represents the past and is not a good indicator necessarily to predict the future. It is important to consider that the return on capital employed can be artificially boosted by having high current liabilities. This can be counteracted by calculating how high the current liabilities are in comparison to total assets.
FedEx has current liabilities of $9.3 billion as reported at the end of the year 2018, and total assets of $54 billion, meaning liabilities are about 17% of its total assets meaning that the current liabilities are not significant enough to cause an impact of return on capital employed.
UPS has current liabilities of $14 billion as reported at the end of the year 2018, and total assets of $50 billion, meaning liabilities are about 28% of its total assets meaning that the current liabilities are not significant enough to cause an impact of return on capital employed.
5.2 Solvency
UPS FedEx
2018 2017 2016 2015 2014 2018 2017 2016 2015 2014
Debt to Total Assets 0.45 0.53 0.40 0.37 0.30 0.32 0.31 0.30 0.20 0.14
Industry ------
Time Interest Earned 10.95 16.78 14.48 22.53 14.14 8.80 9.94 9.15 7.92 21.56
Industry 7.01 7.95 8.24 10.83 7.76 7.01 7.95 8.24 10.83 7.76
Debt to Total Equity 7.53 24.29 39.69 5.80 5.04 0.85 0.93 1.01 0.48 0.31
Industry 1.51 1.36 1.31 1.30 1.50 1.51 1.36 1.31 1.30 1.50 Table 4, Source: (Stock Analysis on Net, 2019)
Debt to total assets ratio for both UPS and FedEx prove to be low, UPS at 0.45 and FedEx at 0.32 showing companies have a low risk of defaulting on its loans as both companies have more than half of their assets funded by equity. Each company has had a steady increase since 2014, but both companies are considered a low risk for bondholders.
32 Time interest earned also proves that both UPS and FedEx have the capacity to meet their interest payment targets as both have a high ratio (10.95 for UPS and 8.80 for FedEx at the end of 2018) being above the industry average for both companies respectively, thus having a low risk of filing for bankruptcy for not being able to pay for their obligations. UPS has a higher interest expense whilst its interest coverage has decreased yet UPS maintains high earnings giving it a higher interest coverage than FedEx. On the other hand, FedEx has had a comfortable interest coverage in the year 2014 but its interest expense has been increasing in line with its increasing amount of debt. These results in interest coverage equated to lower interest coverage than UPS as earnings have not increased significantly in line with the increase of debt to offset it.
As due to different accounting practices of UPS and FedEx due to different calculations of the company’s equity, UPS generates too high of a ratio to compare to FedEx. FedEx has a more sensible ratio being 0.85 as of the end of the year 2018 being well below the industry average and posing itself as a low-risk investment company.
5.3 Activity
UPS FedEx
2018 2017 2016 2015 2014 2018 2017 2016 2015 2014
Current Ratio 1.15 1.22 1.18 1.23 1.37 1.39 1.59 1.50 1.84 1.82
Industry 1.30 1.46 1.43 1.38 1.64 1.30 1.46 1.43 1.38 1.64
Inventory Turnover 47.34 40.68 40.42 42.04 42.90 46.59 42.83 34.93 34.10 36.83
Industry 4.19 4.43 4.49 4.28 4.56 4.19 4.43 4.49 4.28 4.56
Receivables Turnover 8.02 7.51 7.92 8.18 8.74 7.72 7.94 6.94 8.30 8.35
Industry 7.92 6.39 6.59 6.57 7.01 7.92 6.39 6.59 6.57 7.01 Working Capital 33.85 23.19 28.74 23.23 18.38 17.62 12.81 12.65 9.52 10.42 Turnover
Industry 7.46 5.08 5.16 5.68 2.66 7.46 5.08 5.16 5.68 2.66 Table 5, Source: (Stock Analysis on Net, 2019)
The current ratio for both companies is above 1, meaning that these companies are (following this ratio in particular), and is within the range of industry average. The ratio is not deemed too high which would suggest that either company is inefficient at using its assets or short-term financing. FedEx has the lead at the end
33 of the year 2018 (at 1.39 compared to UPS at 1.15). Both companies had a stable decrease in the ratio since 2014, primarily due to an increase of liabilities due to threats to be discussed within the SWOT analysis that affects this industry.
Inventory turnover for both companies is similar towards the end of the year 2018, both companies have a high inventory turnover for the industry that could indicate a bad inventory purchasing plan however being giants of the logistics industry such a high inventory turnover is to be expected. FedEx in 2014 having a much less inventory turnover compared to UPS (36.83 compared to 42.90) has shown a big increase by almost matching UPS at the end of 2018 (46.59 compared to 47.34) with a stable increase after the fall from the year 2014 to 2015.
Receivables turnover suggests both companies are good at receivables collecting, and that debts are adding to the bottom line rather than deducting as both companies have similar ratios from the year 2014. At the end of the year 2018, FedEx receivables turnover ratio stands at 7.72 (slightly below the industry average) compared to UPS at 8.02 being above the industry average.
Working capital turnover suggests that UPS and FedEx are performing well above the industry average in how they utilize their short term assets in order to generate sales. Although FedEx has been increasing its working capital turnover each consequent year since the year of 2014, it still falls short behind UPS with a ratio of 17.62 in comparison to 33.85 by UPS, which is almost double the working capital turnover of FedEx.
34 5.4 DuPont Analysis
UPS FedEx
2018 2017 2016 2015 2014 2018 2017 2016 2015 2014
Profit Margin 6.67 7.45 5.63 8.30 5.21 6.99 4.97 3.61 2.21 4.60
% Change -11 32 -32 59 - 41 37 63 -52 -
Asset Turnover 1.44 1.45 1.51 1.52 1.64 1.25 1.24 1.09 1.28 1.38
% Change -1 -4 -1 -7 - 1 14 -15 -7 -
Financial Leverage 16.56 45.40 99.70 15.51 16.57 2.70 3.02 3.34 2.47 2.16
% Change -64 -54 543 -6 - -11 -10 35 14 -
Return on Equity 158.59 491.00 847.16 196.11 141.62 23.55 18.65 13.20 7.00 13.73
% Change -68 -42 332 38 - 26 41 89 -49 - Table 6, Source: Author
(values in $ in millions except for ratios and percentages)
FedEx has seen a stable increase in return on equity since the year 2015 being above industry average 22.77% as of the end of the year 2018. This has been primarily due to an increase in profitability measured in net profit margin which in turn has increased return on assets despite the decrease in financial leverage. This is a good sign as FedEx is managing to increase its return on equity without acquiring more debt, and has had an increase from the year 2015 to the end of the year 2018 of 336%. UPS results are showing high abnormalities and are hard to compare by standard measures due to high leverage profiles and calculations for equity by UPS is different to FedEx and thus cannot be directly compared.
35 6. Stock analysis
UPS Dividend Yield 6% 6
5% 5
4% 4
3% 3
Dividend Yield Yield Dividend 2% 2
1% 1 ($) (DPS)share per Dividen
0% 0 14 15 16 16 18 19 19 19 20 21 21 23 15 16 17 17 18 20 21 22 22 23 ------Jul Jul Jan Jun Oct Oct Apr Apr Sep Feb Sep Feb Dec Dec Aug Aug Nov Nov Mar Mar May May Date
Avg. Yield % Industry DPS UPS DPS ($) UPS DPS Forecast
6.1 Dividend Yield
Graph 1 (Simply Wall St, 2019)
Graph 2 (Simply Wall St, 2019)
FedEx Dividend Yield 0.03 6
5
0.02 4
3
0.01 2 Dividend Yield Dividend
1 Dividend per share (DPS)($) share per Dividend
0 0 14 15 15 16 16 17 18 18 19 19 19 20 20 21 21 22 23 16 17 21 22 ------Jul Jul Jan Jun Oct Oct Apr Apr Sep Feb Sep Feb Dec Dec Aug Nov Nov Mar Mar
May 36 May Date
Avg. Yield % Industry Avg. Yield UPS DPS ($) UPS DPS Forecast By comparing the two graphs we can see how the companies communicate with their potential investors and current shareholders. UPS dividend per share is above the industry average of 2.56% with a projected growth after the year of 2019 conducted by 23 analysts at Wall Street Pty Ltd to increase by 3.66% next year. FedEx is performing below the industry average with a projected growth of 1.39% and still remain below the industry average by the year 2023. Thus FedEx pays a lower dividend yield than the bottom 25% of dividend payers and FedEx dividend is below the markets top 25% dividend payers within the U.S. whereas UPS is above the bottom 25% of dividend payers and is within the markets top 25% dividend payers (Simply Wall St, 2019). Both companies, however, sustained a stable dividend per share over the past 5 years.
Although UPS may have a higher dividend per share and a higher dividend yield, it could indicate that the company is not innovating and not utilizing their free money to good use, as often companies that have a planned buyout or an acquisition of a company, they may lower their dividends in order to accomplish the planned goal. This could be the case with FedEx due to their aggressive acquisition strategy for growth to be discussed within the SWOT analysis and this could be the reason for the low dividend per share and lower dividend yield, this, however, could result in higher growth. UPS is in a bad light as seen within the trend analysis of financial ratios FedEx has a more steady and higher growth increase from year to year, yet UPS still outperforms FedEx on many profitability ratios and solvency, the dividend yield can reveal that perhaps UPS is not planning to innovate which could result in UPS losing their share of the market as younger companies such as FedEx with aggressive strategies start to dominate the market. UPS relies heavily on the U.S. market and can be in danger if it starts to lose its share to rivals.
37 6.2 Retention Rates
Retention rates further support the argument that FedEx offers a lower dividend due to high retention rates and rapid growth demonstrated by FedEx. UPS has a much slower growth rate seen by ratio trend analysis. Within the last reported the year of 2018, FedEx retained 88% of its earnings whereas UPS has retained 33%. Looking at solely this data and past performance, UPS is not planning to expand in
Retention Rates
100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00%
Retention rate Retention 30.00% 20.00% 10.00% 0.00% 1-Jan-2014 1-Jan-2015 1-Jan-2016 1-Jan-2017 1-Jan-2018 Date
Retention Rate UPS Retention Rate FedEx the near future as no acquisitions were made in the past 5 years. (Simply Wall St, 2019).
Bar Chart 1 (Simply Wall St, 2019)
Retention rate predictions by Wall Street Pty Ltd analysts have forecasted an increase in retention rate by 19% by 2022, signifying that analysts may be expecting UPS to plan a buyout or an investment into maintaining its share in the market. This can be compared with the forecast for FedEx, where the same analysts have predicted only a 1% increase in retention rates by 2022.
38 6.3 Credit Rating
It is important to look at the credit rating of a company as it reflects its financial health. Moody is one of the largest credit rating issuing companies within the U.S. and the following data has been gathered:
UPS as of the end of the year 2018 has a credit rating of A1, which puts it on the credit rating scale of Moodys at upper medium grade. The justification for such a credit rating is that it reflects the good market position of UPS. The supportive elements are among a well organized and recognized brand, high integrated and hard to replicate logistical network and well as the industry-leading profit margin with a relatively predictable free cash flow but highly variable costs in its operating structure. The credit rating that UPS has attained however places itself on the weaker spectrum in comparison to other businesses within the same credit rating.
The resulted negative perspective is due to UPS having significant returns to shareholders during periods of weaker cash flow due to increased capital investment and through benefit pensions plans. There was no further decrease in credit rating because the share price does not exceed free cash flow. In order to increase the credit rating attained by UPS, the company must settle its funded debt by $10 billion. Supporting growth in e-commerce would further improve its credit rating due to demonstrating the ability to thrive in developing markets. (Moodys, 2019)
FedEx as of the end of the year 2018 has earned the credit rating of Baa2, putting it on the lower medium grade on Moodys credit rating scale. FedEx has secured this rating due to good liquidity and cost flexibility, and having a positive trend in volume, pricing and cost management, which has boosted its sales in the past 5 years which has helped to mitigate the financial loss after acquiring the company “TNT” through its acquisition program which has raised its financial leverage significantly. FedEx has announced a $3.2 billion investment on January 26, 2018, and Moodys anticipates that half of it will be funded through tax savings
39 in order to limit the pressure on operating cash flow. The other half is anticipated to be funded by debt offering of pension funding.
The negative outlook is resulted due to heavy capital investment into the integration of the acquired company “TNT”, which could restrict operating margins and cash flow generation for the next year. FedEx promises stability with its past performance and Moodys anticipates a stable increase in operating earnings and operating cash flows, the company regularly performs share repurchases to offset dilution. The credit rating could be harmed however if the share repurchases would exceed the free cash flow funded by new debt and if expected margins from the acquisition of TNT are not met by the end of the fiscal year 2020. Consolidated operating margins must be lowered below 7.5% and sustained cash flow must not equate to below $1.5 billion. (Moodys, 2019)
By comparing the credit rating of both companies one can notice that UPS has a significantly better credit rating (4 ratings higher than FedEx on Moodys credit rating scale). This is mostly due to UPS having a much more stable strategy in comparison to FedEx. The main decrease in the credit rating of FedEx is due to its high risk, high reward, acquisition strategy which from one perspective allowed the company to rapidly expand in a relatively small amount of time, however, at the same time, this may not be favorable for short-term investors due to the risks associated. Its low dividend yield is justified as the company is investing a large portion of its capital in order to buy back shares and integrating the newly bought out company “TNT”. UPS faces a different problem that sets a credit rating ceiling, is that its obligated to pay back its funded debt at the large sum of $10 billion.
6.4 Annual Growth Comparison
Earnings growth is estimated to be 9.5% by the end of 2019, in comparison to the industry average of 10.5%, meaning UPS is falling behind, solidifying the thought that UPS is not actively innovating and growing the company further quickly enough relative to its competitors. FedEx is estimated to have an earnings growth of 12%, being above the industry average. UPS is estimated to have the revenue growth increase by 4.8% in comparison to the industry average standing at 6.3%,
40 with FedEx falling behind UPS and the industry at projected 4.5% increase by the end of 2019. Both companies are ex ceeding the low -risk savings rate of 2.7%. Although the increase rate of earnings may be more than average from FedEx, it is not considered high growth. The annual growth forecast can be represented by
Annual Growth Forecast End of Year 2019
12.0% 10.0% 8.0% 6.0% 4.0% Growth Rate Growth 2.0% 0.0% Earnings Growth Revenue Growth Název osy
FedEx UPS Logistical Industry the bar chart below:
Bar chart 2 (Simply Wall St, 201 9)
Although FedEx is expected to outperform the industry and UPS at the end of the fiscal year 2019 with its earnings, the revenue generated is below the industry and UPS. As earnings are also referred as net income, FedEx’s bottom line will be larger th an that of the industry average or UPS, with a lower revenue than UPS this indicates that FedEx is more efficient at generating its cash flow.
41 7. SWOT Analysis FedEx
7.1 Strengths
• Global distribution and global recognition through acquisitions of smaller companies worldwide is a key strategy by FedEx to increase outreach and service coverage. • By owning daughter companies such as FedEx Express, FedEx Ground, FedEx Freight and FedEx Office, the company assures that deliveries are assured and all their logistic services are utilized. • Timely deliveries are a big advantage of FedEx. • Targeting markets and filling their needs with their services, thus expanding coverage. • Corporate culture and workforce are considered as one of the strengths of the company. • Values such as responsibility, loyalty, and integrity are a part of the organizational culture. • Competitive wages and employee compensations. • Globally recognized by magazine “Fortune”, in the title “Worlds most admired corporations” and “100 Best Companies to Work For”. • Various international airports as distribution hubs allow for strong name recognition. • Various agreements such as priority mail and drop boxes with other companies. • Only US-based courier service with aviation rights for Chinese trade centers. • First service to have rights for direct air routes to India. • E-Commerce services development. (Investors.fedex.com, 2019)
42 7.2 Weaknesses
• Globalization cost rises to maintain global infrastructure. • Competition through heavy goods being preferred to distribute by ship than by plane as its more cost effective. • One of the services offered by FedEx, ZapMail Fax lost $190 million which is a substantial financial loss that would ripple through other operations of the company. (Investors.fedex.com, 2019)
7.3 Threats
• Competition with other private postal services such as UPS and DHL. • Fuel cost for kerosene is rising with new international agreements to preserve the environment. • New international laws specifying specifics of cargo ships allowed in certain waters as well as single jet engine planes being banned from serving as cargo planes in certain countries. (Unfccc.int, 2019) • Countries in crisis where operations are taking place. • Salaries must maintain competitive standing and thus increasing. • Multiple big lawsuits are currently ongoing (biggest being IRS investigating FedEx for misclassification of workers for $319 million). (Investors.fedex.com, 2019)
7.4 Opportunities
• Tracking system for ship deliveries • Investment in new computer informatics to aid in the network for operations in globalization. • New contracts with companies for cost-effective fuel will increase the company’s ability to maintain a competitive advantage. • Recent taxation policy within the U.S. by Donald Trump “Tax Cuts and Jobs Act” would benefit the company in tax relief. (Tax Foundation, 2019)
43 7.5 SWOT Evaluation
By having the financial resources, FedEx is able to adapt to changes in the market, by having a good reputation for being as a responsible service provider as well as an employment company, the company stands as an innovative, up to date, integrated business.
Current largest threats are the dependency on employees and fuel prices, which in the last decade was the reason for the closing of many aviation-related companies. The company must also work on unifying their workforce through more computer informatics investments, this would improve their efficiency within their logistics chain. (Investors.fedex.com, 2019)
In order to maintain a competitive advantage, FedEx must use their available resources to compete for coverage with UPS and DHL. Although FedEx owns 22% of the Asian market, DHL is leading at 32% due to its technological advancement through the radio frequency identification (RFID) system. FedEx cannot control the fuel prices and thus financial loss cannot be currently avoided, however by employing contractors as drivers in order to avoid lawsuit costs would be in the long run causing financial benefit for the company and an increase in efficiency. (DHL, 2019)
44 8. SWOT Analysis UPS
8.1 Strengths
• Due to the high use of technologies and automation, UPS can effectively adapt to market needs. • UPS brand portfolio allows the company to expand into different product segments due to its high reputation. • UPS invests a lot of money into quality control and employee training facilities to boost morale and work ethic. • Being the largest private parcel delivery company, their distribution network is developed and advanced compared to its competitors, which allows them to reach more potential markets. • High customer satisfaction, UPS in 2018 achieved the highest performance amongst its competitors in delivering parcels during holidays, achieving 98.3% on-time deliveries. (Eu.commercialappeal.com, 2019) • Integrated successfully technology companies to aid in innovation and speed up logistics. (Investors.ups.com, 2019)
8.2 Weaknesses
• Marketing of the products in terms of positioning and clear definition is lacking, even though sales are high, competitors may take advantage of this and compete in this field. • Adjacent product segments are hard to develop as current organizational infrastructure is only fit for the current business model. • The profitability ratio and contribution percentage are below the average amongst its competitors. • Predicting the market lead to missed opportunities in bad forecasts and lack of foreseeing product demands approaching. This leads to retaining inventory which leads to financial loss in keeping inventory and warehouse space.
45 • Although spending more than its competitors on research and development, competitors were able to be more innovative in the past years. • UPS was not able to retain its share in some markets to new market entrants, this lead to loss of profit. (Investors.ups.com, 2019)
8.3 Threats
• New international laws specifying specifics of cargo ships allowed in certain waters as well as single jet engine planes being banned from serving as cargo planes in certain countries. (Unfccc.int, 2019) • A rise in fuel costs. • Liability laws in certain markets can lead to profit losses. • Lack of skilled workforce in certain market segments UPS covers. • UPS relies on seasonal product sales which if were to change, could lead to detrimental losses for the company. • New emerging entrants into the market. • Currency fluctuations due to large coverage and low net income compared to total revenue. (Investors.ups.com, 2019)
8.4 Opportunities
• UPS has stable cash flow, this enables them to use their cash in the bank to invest in opportunistic activities and other product segments. • New technological advances will enable UPS to practice differentiated pricing. This would retain loyal members and attract new customers through competitive pricing. • Recent taxation policy within the U.S. by Donald Trump “Tax Cuts and Jobs Act” would benefit the company in tax relief. (Tax Foundation, 2019) • Government is interested in procuring UPS products by the state with government contractors. • Environmental policies could set back competitors and allow UPS with its high research and development tactic to gain a competitive advantage.
46 • Investment into online data analytics, UPS can learn more about its customers and demands and thus alter their products and marketing strategy to reach out to new customers. This can also give insight into consumer behavior and it’s an opportunity to build more strategic plans to up the revenue. (Investors.ups.com, 2019)
8.5 SWOT Evaluation
UPS has a great potential to regain competitive advantage, its global recognition is high and their customer satisfaction maintains its recognition. More development on the internal issues would enable UPS as a mature company to carry on and innovate and maintain a high position in the market. UPS is highly dependent on the US market for revenue as it accounts for 70% of the total income and must maintain their customer satisfaction within the region highly. This could be achieved by investing in employee training for engagement to raise productivity and performance.
Through time technological advances will be key, UPS in the past brought diverse solutions for logistical problems to the table which secured them with partners for handling supply chain issues. Currently, UPS competitors have adopted the use of technologies such as RFID system that increases the efficiency of the logistics chain, UPS must invest in similar technologies in order to maintain its position on the market, as this would cut down costs, in the long run, creating more free resources to invest in its opportunities.
47 Conclusion
This thesis investigated two logistical giants UPS and FedEx assessing their financial health. Through utilizing different financial analyses conclusions can be made as to how these companies compare within their industry. FedEx has shown a good growth since the year 2014 compared to its competitor UPS, with a more aggressive strategy of acquiring companies discussed within the SWOT analysis, FedEx has been closing in the gap between its competitor UPS each year with a stable trend in net profit margin, asset turnover, inventory turnover and return on assets. UPS having a more volatile trend pattern of increases and decreases has outperformed FedEx on net profit margin, return on assets and interest coverage proving to be more solvent. The liquidity of each company is stable, short term obligations can be met and the risk of bankruptcy is low, inventory and receivables turnovers are managed competitively. UPS utilizes its sales into profit better than FedEx as well as using its assets to generate profit due to a higher return on assets and thus proves to be as of last year to maintain its position as a more profitable company. Although FedEx shows more predictable trends and steady growth, UPS as of the data collected up to the end of the year 2018 has proven to be more financially healthy due to higher solvency, profitability, and liquidity. During this research a problem was encountered due to accounting practice differences between the companies and return on equity could not be compared due to high difference significantly off the industry average. This is due to high leverage profile resulted from the different calculation of the company’s equity and thus adjusted ratios must be derived by UPS in order to be able to compare them to other companies and this is one of the limitations of this thesis. Further research could be done to compare the debt coverage to explore the solvency of each company in the near term. By looking at the trend analysis one could derive that UPS has been more stagnant compared to FedEx in its growth due to low percent changes from year to year in comparison with FedEx. From the SWOT analysis, it could be seen that UPS has failed to maintain its position in other markets and its highly dependent on the US market. This could be eliminated by utilizing its research in technologies to
48 eliminate weaknesses within the companies marketing, this could improve sales and new entrants would find it hard to compete. Differentiated pricing could be welcomed in other markets and UPS can take hold of the opportunity to expand in other markets to avoid high dependency on the US market. Dividend yield calculations have supported this argument as although UPS has a higher dividend and the dividend yield is higher than the industry average, it could be because the company is not planning into investing it into growing its operations as its retention rates are only 33%, this is a welcoming factor for potential investors however it could be falsely assumed that the company is financially healthy long term. FedEx has a retention rate of 88% as the companies acquisition strategy requires for large retained earnings in order to buyout more companies, thus FedEx has a lower dividend and dividend yield. Credit rating analysis has justified the low dividend yield further by specifying that in the fiscal year 2019 FedEx is working on integrating the newly acquired company “TNT” and buying back its shares to offset dilution. The forecasted values by analysts indicate that UPS is likely to retain more money by the end of 2022 as its predicted retention rate is estimated to be 51%, this could mean lower dividend per share and a lower dividend yield however with paying out dividends being ingrained into the company, this may cause UPS to borrow money in order to pay their dividends as lowering their dividend per share price could alert their shareholders to sell their stock, this has harmed its credit rating however as UPS acquires more debt in order to pay back its shareholders, on the other hand, UPS cannot improve its credit rating as it must pay back $10 billion in order for credit rating companies to position them higher on the credit rating scale. FedEx having an aggressive strategy is facing risks of poor company acquisitions as with the case of ZapMail, current industry threats of high fuel costs and rising salaries for employees in order to stay competitive could sink the company after a number of poor acquisitions. Although this strategy could be deemed high risk, FedEx has been successfully utilizing it for rapid globalization. Due to lawsuit costs, FedEx must reconsider losses in the long run from cutting costs by questionable practices for hiring contractors.
49 Unless UPS makes the right investments and utilizes its cash flow in order to globalize into other markets, it could be predicted that FedEx would overtake UPS by the next decade due to aggressive globalization tactics (if they are to be conducted and integrated successfully) as analyst predictions are showing a higher growth rate for FedEx than UPS.
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