semeinar ups

The Battle for Value, 2004
Fedex Corp vs United Parcel Service, Inc.

Fedex stock price reaction


Loss of profits on the Penney relationship
◦ less able to finance internally

UPS gains franchise value on future business with Penney
 signal to investors of competitive disadvantage 

Origins and strategic forces of the industry UPS was the dominant firm in the 1970’s
 Deregulation (airlines, trucking)
 Innovation in information and process technologies  Inflation
 Emphasis on customer service, quality, globalization, reengineering


Financial performance
Financial statements
 Financial ratios
 EPS and PE ratios
 Total returns to investors
 Economic Value Added


Financial statements


Strengths
◦ Reveals trends
◦ Comparison of absolute sizes



Weaknesses
◦
◦
◦
◦
◦

No assessment of efficiency
Biased by size differences
Book, not market values
Influenced by GAAP choices
Backward looking

Financial Ratios


Strengths
◦ Adjusts for size differences (relative measure)
◦ Provides comparative measures of efficiency and growth



Weaknesses
◦ Based on book, not market values
◦ Influenced by GAAP choices
◦ Iidentification of “norm” is problematic

EPS and P/E Ratios


Strengths
◦ Widely used and recognized
◦ Linked to market price of stock



Weaknesses
◦
◦
◦
◦

EPS influenced by GAAP choices
EPS not a cash flow
P/E difficult to interpret
Sensitive to choice of observation period

Total Returns to Investors


Strengths
◦ Cash flow based
◦ Market value based
◦ Permits benchmarking vs. other investments



Weaknesses
◦ Sensitive to choice of observation period
◦ Needs to be adjusted for risk

Economic Value Added (EVA)


Strengths
◦
◦
◦
◦
◦



Risk-adjusted
Permits benchmarking
Theoretically linked to market values
Logically appealing
Increasingly widely used

Weaknesses
◦ Influenced by GAAP choices
◦ Ignores latent