• FedEx – Business model conceived by Fred Smith (undergraduate term paper)

– Invests $4 million of his own capital and raises an additional $91 million

– Company launched in 1971 with FedEx Express

• Provides transportation, e-commerce and business services

• Four business segments: Express, Ground, Freight & Services

• By 2009*

– $35 billion in revenues

– 6.9 million daily shipments

– 694 Jets & 22,000 ground vehicles

The Surviving 6 2

FedEx Company History

*Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.

• UPS – Company launched in 1907 as American Messenger Company, by Jim

Casey (19 years old)

– Company renamed United Parcel Service of America in 1929

– Logistics services including: transportation, distribution, ocean and air freight, brokerage and financing

• Three business segments: U.S. Domestic Package, International Package & Supply Chain, and Freight

• By 2009* – $45 billion in revenues

– 15.8 million daily shipments

– 268 Jets & 101,900 ground vehicles

The Surviving 6 3

UPS Company History

*Source: Rucker. JD. www.fastcompany.com/1716317/fedex-vs-ups-numbers (Jan 12, 2011). FedEx vs. UPS: By the Numbers.

The Surviving 6 4

Enterprise Value Calculation Flowchart

EBIT = Revenue – COGS – Selling & Admin Expense NOWC = OCA - OCL YTM of bond CAPM

NOPAT = EBIT(1 – T) ΔNOC = ΔNFA + ΔNOWC Cost of Debt (rd) Cost of Equity (rs)

FCF = NOPAT - ΔNOC WACC = wdrd(1 – T) + wsrs

Enterprise Value = FCF1(1 + WACC) + FCF2(1 + WACC)2 + … + FCF5(1 + WACC)5

2008 2009 2010 2011 2012 FedEx $(53M) $(304M) $619M $(47M) $(415M) UPS $5,101M $2,083M $2,224M $3,578M

The Surviving 6 5

Historical Free Cash Flow (FCF)

• 2009 Global Economic Recession – Significant drop in business & stock value

– Sales revenues down for both FedEx and UPS

• FedEx Express business segment hit the hardest

• High fuel prices

General • Global economic recovery timeline

– Reduced earnings forecasts in 2012/13

– Trade volumes

– High fuel prices

• Corporate tax increase

• Boost profits by increasing shipping rates

The Surviving 6 6

General Assumptions for FCF Analysis

The Surviving 6 7

FedEx Assumptions for Future FCF

FedEx • Strategic acquisitions in growing global markets (Mexico, Poland, France

and Brazil)

• Cost Cutting Plan

– Boost profits by $1.7 billion annually through shedding jobs, aircraft and underused assets

– 3-year plan starting in 2012

• International Expansion

– South Africa, Italy, Istanbul and Turkey

The Surviving 6 8

FedEx Assumptions for FCF Analysis

2013 2014 2015 2016 2017 Sales 1.25% 1.75% 2.00% 2.50% 2.50%

COGS/Sales 50.00% 50.00% 50.00% 50.00% 50.00%

S&A/Sales 70.00% 70.00% 70.00% 70.00% 70.00%

Tax Rate 37.50% 37.50% 38.50% 38.50% 38.50%

CA/Sales 38.94% 38.27% 37.51% 36.60% 35.53%

CL/Sales 23.00% 23.00% 23.00% 23.00% 23.00%

• Weighted average of sales growth in past years = 1.65%. Expect small drop followed by increase with economic recovery

• COGS + S&A based on previous average

• Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase

• Current Assets and Current Liabilities shown as percentage of total sales

UPS • FY13 rate increase

– 4.5% for UPS Air (4.9% for select destinations)

– 4.9% for UPS Ground

• Expand main European air hub in Cologne, Germany by 70%

– 190,000 packages per hour

– Targeted completion in 2013

• Planned Acquisition of TNT in 2012

The Surviving 6 9

UPS Assumptions for FCF Analysis

The Surviving 6 10

UPS Assumptions for FCF Analysis

2012 2013 2014 2015 2016 Sales 2.50% 3.00% 4.00% 4.50% 5.00%

COGS/Sales 50.00% 50.00% 50.00% 50.00% 50.00%

S&A/Sales 80.00% 80.00% 80.00% 80.00% 80.00%

Tax Rate 35.70% 35.70% 36.70% 36.70% 36.70%

CA/Sales 29.00% 29.00% 29.00% 29.00% 29.00%

CL/Sales 11.00% 11.00% 11.00% 11.00% 11.00%

• Slow growth rate for 1st 2 years with subtle growth later

• COGS + S&A based on previous average in 2011

• Current Average Tax Rate for 1st 2 years followed by 1% corporate tax increase

• Current Assets and Current Liabilities shown as percentage of total sales in 2011

2012 2013 2014 2015 2016 2017 FedEx $(415M)* $1,068M $1,048M $1,005M $1,013M $1,039M

UPS $3,415M $3,753M $3,766M $3,903M $4,066M

The Surviving 6 11

Projected FCFs

* Actual FCF

The Surviving 6 12

Bond Yields (rd)

• FedEx – 20-year bond, non-callable, non-transferable

– Price $102.50, YTM 2.337%

– Bond Rating BBB, low-medium grade

• FedEx rd used as approximation for UPS rd

– No qualifying bonds for UPS

• Cost of Debt – rd = YTM = 2.337%

– For WACC calculation….. rd = 2.337% * (1-.362) = 1.49%

The Surviving 6 13

Cost of Equity (rs)

CAPM FedEx UPS

rRF 4.69% 4.69%

RPM

7.74% 7.74%

β 1.2386 0.8432

Cost of Equity 14.28% 11.22%

DCF FedEx UPS

D0 $0.54 $2.28

D1 $0.58 $2.42

P0 $91.46 $72.50

g 7.70% 6.17%

Cost of Equity 8.34% 9.51%

Bond Yield + Risk Premium

Yield 2.337%

Risk Premium 5.00%

Cost of Equity 7.337%

The Surviving 6 14

Weighted Average Cost of Capital (WACC)

*Cost of debt based in FedEx bond yield

WACC = wdrd(1 – T) + wsrs

FedEx UPS

Wd 5.68% 0.048%

rd

2.34% 2.34%*

T 36.2% 35.7%

Ws 94.32% 99.95%

rs 14.28% 11.22%

WACC 13.55% 11.21%

The Surviving 6 15

Enterprise Value & Stock Valuation

FedEx UPS

PV of Terminal Value $4,050M $21,318M

PV of FCFs

$3,600M $13,785M

Enterprise Value $7,650M $35,103M

Current Share Price $89.71 $73.43

Est. Intrinsic Share Value $12.49 $52.99

Questions?