Revolutionary air-transportation covenant

1. What happened to the two company’s stock price in 2004? Why did it rise? Did one company outpace another and if so why do you think that happened? How should we interpret any increases?

 

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Mid-year 2004, China and the United States attained a revolutionary air-transportation covenant that increased the number of commercial cargo trips between the two nations four-fold. In addition, the agreement encompassed the permission for air-cargo hubs to be created in China and also sanctioned the right for commercial airlines to land at any accessible airport. Taking into consideration that United Parcel Service, Inc, together with FedEx Corporation were the sole all-cargo carriers at the time, it implied that they could expand their operations to the Chinese market. This major market prospect led to an increase in the stock price for the companies. However, it is imperative to note that one company did outperform another. In particular, the share price of FedEx increased at a rate of just about five time quicker as compared to UPS.

 

The main reason why FedEx has a better performance and therefore greater increase in share price is because it had a competitive advantage over UPS. To begin with, the corporation had the biggest international presence in China as compared to UPS. Having a bigger market share implied that it could increase its operations and therefore increase the revenues and profits generated. Notably, FedEx was able to have 11 flights transport cargo to China on a weekly basis, a number that was double the number of flights operated by UPS. It is also important to point out that FedEx was able to provide its carrier services to 220 cities in China and had direct flight to major cities, for instance Shanghai, Beijing, and Shenzhen. In the one financial year between 2003 and 2004, FedEx experienced a significant growth with its volumes in China increasing by more than 50 percent.

Any increases should be interpreted as growth and development in the market and also gaining competitive advantage over industry rivals. For instance, the significant increase in stock performance for FedEx Corporation as compared to that of UPS not only implied major growth in the overseas market and having a competitive advantage, but also meant that it generated greater revenues and profits compared to its main market competitor.

 

2. Why didn’t UPS create an overnight delivery service and how did Fedex successfully enter this market?

 

The main reason why UPS did not generate a service for overnight delivery is because the company is conservative from a financial standpoint and focuses of diminishing its costs. Notably, overnight delivery services lead to an increase in the costs incurred by the company, an aspect that contradicts the mission of UPS. In contrast, FedEx managed to successfully pull off entering the market. This is largely for the reason that the company made major investments in a fleet of aircrafts prior to market entry. In addition, when UPS entered the market later on, establishing such overnight delivery services was substantially costly.

 

3. What’s going on in the industry? How do those things potentially impact Fedex and/or UPS? How do they impact how Fedex and/or UPS will behave in the future? How are the two firms competing?

 

Some of the key things going on in the industry is the advancement of e-commerce together with home delivery for consumers. In the contemporary, progressively more consumers have a preference for shopping at the comfort of their homes and having the products delivered to their homes in an expedient manner. In accordance to Derousseau (2017), online shopping has impact the profit margins for the company and obligated them to begin an overhaul of their supply chains. For delivery companies such as UPS and FedEx, the shortcoming of the boom and thriving in e-commerce is that product deliveries to consumer homes are comparatively unprofitable. This is because they encompass solely one or two commodities different from the ability of shipping products in bulk and decreasing the cost per delivery.

 

These industry trends are influencing both UPS and FedEx are expected to continue impacting them in the future periods. Imperatively, UPS has been adversely affected. This is owing to the reason that its ground business operation, which encompasses residential drop-offs, deals with 40 percent more deliveries everyday as compared to FedEx. This has led to the company’s stock to grow slowly compared to FedEx over the past five years, with e-commerce significantly impacting its profits negatively. In addition, these advancements are significantly bound to impact both FedEx and UPS with the rise of Amazon in the market. This is for the reason that in recent periods Amazon has been able to test its own delivery service packages to be able to decrease the backlogs in its warehouses (Derousseau, 2017).

 

The two companies are competing for domination in the courier services. On one hand, FedEx express is facilitating the company to have a competitive advantage owing to guaranteed next day deliveries and also global services that are well-timed at cheaper prices. On the other hand, UPS rivals FedEx in the market by offering two kinds of time-definite delivery services. The domestic services rendered in the United States consist of time-definite delivery of packages whereas the global services rendered includes delivery to more than 220 nations across the globe. In addition, UPS offers services for Freight and Supply Chains, including designing of supply chains, implementation and management as well as distribution.

 

4. How have the two companies performed financially? How do you measure financial performance and why? What do the statements and ratios tell you? What does the stock price tell you? How is EVA calculated and what information can you derive from it? Does EVA move in the same direction and to the same degree as does the stock price?

 

Financial performance measurement is an important aspect of ascertaining how efficaciously a business is run and also its financial health. One of the main ways of measuring financial performance is examining the financial ratios. Measuring these financial ratios against those of the industry, for preceding years and also those of competitors makes it possible to ascertain problems or success within a business. Another way is analyzing the financial statements of the company, including the income statement, statement of financial position, and cash flow statement. These financial statements are indicative of the revenues and profits generated, together with the cash flow (Rao, 2011).

 

The financial performance of both companies is impressive. The financial and analytical ratios of companies indicated that the financial health and position of the companies improved in the subsequent financial years. For instance, with respect to profitability analysis, the net profit margin of FedEx significantly improved from -1.51 percent in 1992 to 3.45 percent in 2003.

 

Similarly, the net profit margin of UPS increased from 3.12 percent in 1992 to 8.65 percent in 2003. This implies that the profits generated by the companies significantly increased. The same case implies to the return on assets and return on total equity ratios. The ROA of FedEx increased from 1.63 percent in 1992 to 6.30 percent in 1993. This implies that in the 10-year period, for every dollar invested in its assets, the company generated an increased return from 1.63 cents to 6.30 cents. In the same manner, the ROA of UPS significant improved from 6.47 percent in 1992 to 10.33 percent in 2003. This implies that in the 10-year period, for every dollar invested in its assets, the company generated an increased return from 6.47 cents to 10.33 cents. This shows that the companies’ profitability level significantly improved, an indication of their enhanced financial performance.

This impressive financial performance of the companies can be perceived through liquidity analysis. The liquidity ratios of the companies including current ratio, cash ratio, defensive interval, and cash from operations ratio considerably improved in the financial period between 1992 and 2003. For instance, the current ratio is a financial ratio that indicates the ability of a company to handle its short-term obligations. The current ratio of FedEx Corporation improved from 0.87 in 1992 to 1.18 in 2003. In the same manner, the current ratio of UPS improved from 1.03 in 1992 to 1.79 in 2003. However, the financial statistics indicate that

 

FedEx had a superior financial performance as compared to UPS. To begin with, the sales of FedEx significantly increased from 3.42 percent in 1992 to 9.12 percent in 2003. In the same manner, the net income of the company impressively improved from -147.34 percent to 35.51 percent. On the other hand, as for UPS, the sales of the company increased from 7.65 percent in 1992 to 10.37 percent in 1997 but considerably declined to 2.04 percent in 2001. In the same manner, the net income of the company declined from 56.86 percent in 1992 to -8.93 percent in 2003.

 

The stock price of the company mirrors the perception of the investor of its capability to earn and develop its profits in the future. In general, when the stock price is higher, it means that there is increased optimism regarding the prospects and opportunities of the company, which also leads to an increase in market value. On the other hand, when the stock price is lower, it means that there is decreased confidence concerning the projections and business opportunities of the corporation, which also gives rise to a decline in market value. The share price patterns of UPS and FedEx between June 2003 and June 2004 show a progressive increase. This implies that there are positive prospects for both of the companies and therefore are expected to have better financial performance (Rao, 2011).

 

Economic value added (EVA) is metric that delineates the financial performance of a corporation on the basis of the residual wealth computed by subtracting its cost of capital from its operating profit, and attuned for taxes on a cash basis. In essence, EVA tries to seize the actual economic profit of a corporation. EVA is calculated using the following equation:

Net operating profit after taxes – Invested capital * Weighted average cost of capital

 

The information that can be derived from EVA is the cost or charge incurred for capital investment into a particular project and subsequently appraising whether it is creating sufficient cash to be deemed a good investment (Investopedia, n.d). Notably, EVA moves in the same direction and to the same degree as does the stock price. In accordance to Stewart (2013), stock prices follow economic value, which is depicted by EVA. An increase in stock prices offers an incentive to the confidence of households and firms and decreases the ambiguity they have regarding their future economic situation. Therefore, this indicates that EVA and share price move in the same direction.

 

5. If you had to pick one company to invest your life savings in, which one? Yes, you have to pick one!

 

If I had to pick one company to invest my life savings in, it would be Fed Ex. This is largely for the reason that the company has a greater market share overseas and therefore implies that it has a greater possibility of increasing its business operations, therefore increasing revenues and profits. In addition, FedEx is considerably more innovative in comparison to UPS. In particular, the company has been able to boost its share performance owing to the accomplishment of its overnight delivery business. In addition, the company has impressively developed its consumer business, from 25 percent to 45 percent in the past 10 years. In addition, the company has made significant investments to improve its business. For instance, the company has invested in automated hubs for shipment and unveiled such facilities. This level of investment is considerably more advanced as compared to UPS (Derousseau, 2017). In addition, both of the companies are presently facing increasing pressure from the advancement in e-commerce, an aspect that is bound to continue influencing them in the future. However, FedEx has been able to deal with the growth of e-commerce in a better manner. The performance metrics of UPS have been adversely affected by the growth in e-commerce. This implies that the company experiences losses in peak seasons and will be forced to spend considerable sums to be able to avoid losses in the future. During periods such as the holiday periods when e-commerce is significantly booming, it implies that the profitability of UPS is hampered. In the long run, these investments and progression in technology and innovation is bound to improve the share performance of FedEx, which therefore makes it the better company to invest in.
References

Derousseau, R. (2017). Can UPS and FedEx Deliver for Investors? Fortune. Retrieved from: http://fortune.com/2017/10/26/ups-stock-fedex-stock-ecommerce/

 

Investopedia. (n.d.). Economic Value Added – EVA. Retrieved from: https://www.investopedia.com/terms/e/eva.asp

 

Rao, P. M. (2011). Financial Statement Analysis and Reporting. Eastern Economic Edition, PHI Learning Private Limited, New Delhi.

 

Stewart, B. (2013). Best-practice EVA: The definitive guide to measuring and maximizing shareholder value. Hoboken: John Wiley & Sons.

 


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