Financial analysis refers to an assessment of the viability, stability and profitability of a business and its operation. It is maintained by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management, share holders, government, and public investors as one of their bases in making business decisions, investing decisions, tax implementing decisions.
Financial analysts often assess the firm's
Profitability: The ability to earn income and maintain growth in both short-term and long-term. The degree of profitability is usually based on the income statement, which reports operations of the company
Solvency: The ability to pay its obligation to creditors in the long-term
Liquidity: The ability to maintain cash flow, while satisfying short term obligations
Stability: The firm's ability to remain in business in the long run, without having to sustain losses in conduct of its business.
ECECUTIVE SUMMARY
The main purpose of this report is to evaluate the position of United Parcel Service in terms of financial strength, market position, current performance and forecasting.
The company's ratios, performances and forecasting analysis help us to identify market position, risks and its opportunities to fight competition. The investigation on UPS brought in our knowledge that only showing the profit does not mean that company is successfully moving towards it goals and in stable position. Liquidity ratio near 2 and low gearing also plays the major role in company's performance,
The other main point is to never make decision on increasing share price of the company because increase in share price does not always reflect the high sale and profitability of the company, this increase could be the result of company's other internal operations that are hidden and would not be long term. Sometimes multinational companies take new strategic approaches and new ideas to accomplish their goals in order to get competitive edge over its competitors. Unfortunately these new strategies sometimes fail and increase risks for business that result in new challenges to be faced by senior management. At the end it remains with the strength of the company that how effectively and efficiently it faces the challenges, how much it satisfy its customers and how it compete in the tough market
INTRODUCTION
MISSION STATEMENT: "As the world's largest package delivery company and a leading global provider of specialized transportation and logistics services, UPS continues to develop the frontiers of logistics, supply chain management, and e-Commerce ... combining the flows of goods, information, and funds."
VISSION STATEMENT: "the enablers of global e-commerce"
COMPANY PROFILE
United Parcel Service, Inc., It is a package delivery company that provides transportation, logistics, and financial services in the United States and internationally. The company operates majorly in three different segments
U.S. Domestic Package
International Package
Supply Chain & Freight
The United States domestic package segment operations include punctual delivery of letters, documents, and parcels within the United States. The International Package segment provides air and ground delivery of packages and letters to about two hundred countries, which includes shipments outside the United States and shipments with origin and distribution outside the United States and domestic services move shipments within a country's borders. The Supply Chain and Freight segment offers forwarding and logistics services which include supply chain design and management, freight distribution, brokerage, mail, and consulting services In addition, it offers various technology solutions for automated shipping, visibility, and billing; information technology systems and distribution facilities for industries, such as healthcare, technology, and consumer/retail; and a portfolio of financial services that provides customers with short-term working capital, government guaranteed lending, letters of credit, international trade financing and export financing. As of December 31, 2009, the company operated a fleet of approximately 101,900 package cars, vans, tractors, and motorcycles, as well as an air fleet of approximately 510 aircraft. United Parcel Service, Inc. was founded in 1907 and is headquartered in Atlanta, Georgia. The company's major competitors are Federal Express, U.S postal services and in foreign market DHL and TNT are its their major competitors. UPS are hugely dependent on the US markets compared to international markets.
COMPETITORS ANALYSIS
Over the years the stand out competitor of UPS is FedEx, it is a carrier service best known for offering express package and shipping document since pioneering shipping in the 1970. FedEx operates in American business customers as their primary market but is moving rapidly into international markets. FedEx is the market leader in express shipping in the US with 49% of market share. In ground shipping, it is struggling to establish itself in a market dominated by UPS. In its freight business, FedEx is gaining market share but success is uncertain.
2009 fiscal year was a decline for FedEx, revenues decreased by from $37.953 billion to $35.497 billion by 6.5%. The Ground Segment revenues increased but the decline in revenue was largely on FedEx's Express segment. It decreased in its sales in domestic and international markets. FedEx was able to increase its revenue per package at 3% in its ground Segment; the drops in revenue per package of 3.5% and 3% in the express and freight segments, respectively, contributed to FedEx's decline in its operating margins from 5.5% to 2.1%. A combination of high operating expenses and falling revenues ultimately led to a deterioration of FedEx's return on equity and return on assets,. Although the company remained profitable, its operating income and net income both fell substantially, to $747 million and $98 million, respectively. These represented 64% and 91% declines, respectively
RATIO ANALYSIS
Financial ratios are derived fom financial information from a company's financial statements. It can provide financial analyst an excellent picture of a company's financial situation and the trends that are developing within the organization.
Financial ratio analyses are grouped into categories which provide us about different facets of a company's finances and operations. The following are the various kinds of financial ratio.
Leverage Ratios: The ratio shows the extent of debt is used in a company's capital structure.
Liquidity Ratios: It provides company's short term financial situation or solvency.
Operational Ratios: It shows how efficient a company is in its operations and use of assets.
Profitability Ratios: Shows the margin analysis and show the return on sales and capital employed.
Solvency Ratios: The picture of a company's ability to generate cashflow and pay it financial obligations
RATIO ANALYSIS
PROFIT IN BILLIONS-UPS
PROFIT IN BILLIONS-FEDEX
PROFITABILITY
Profitability ratio of UPS shows that they were going smoothly with increase in all ratios from 2006 till 2008. Major changed were sighted in 2007 where return on capital employed and asset turnover decreased respectively from 25% to 1.7% and 1.9% to 1.7%. On the other side there is a prominent change in the net profit and gross profit margin which shows that there were major change in their prices and there were external pressure. In 2007, the company significant increase on their compensation and benefit which was about 31,745 million dollars compared to 24,421 million dollars in 2006 and 26,063 million dollars in 2008, this increase in compensation and benefits had significant impact on the company's capital employed and the net profit margin.
UPS earnings in coming years will depend largely on the US economy. The domestic revenue currently accounts for 62% of UPS's total package business .The dependence on the US economy was apparent in the second Quarter in 09 earnings: UPS lost 4.6% of its domestic volume and reported a 49% decline in earnings. Similarly, international package volume fell by 5.5%, an even larger dropped than that seen in the domestic volume.
In the second quarter they reported an operating profit of $895 million on 16.7% revenue decline for the second quarter ended June 30. Adjusted diluted earnings per share were $0.49 compared to $0.85 last year. The quarter's results were significantly affected by continuing weakness in global economic activity. Adjusted diluted earnings per share exclude a charge for the re-measurement of certain foreign currency obligations which did not qualify for hedge accounting treatment. The after-tax charge was $48 million and had no impact on operating income or cash flow. Including this non-cash charge, diluted earnings per share were $0.44. Consolidated revenue for both domestic and international was $10.8 billion compared to $13.0 billion for the prior-year quarter, while consolidated volume was 914 million packages, which were down by 4.7%.Average volume in the domestic Package segment declined 4.6% in the quarter. Air volume was low while ground volume declined 5.4%. The domestic package revenue per piece hit low to 7.8% due to the decrease in fuel surcharges, Even though with such a volume decline, this business gained substantial market share.
For the third quarter UPS reported diluted earnings per share of $0.55 for the third quarter on $11.2 billion in sales. A stabilizing economic environment led to improving trends during this quarter, while UPS's International business continued to increase market share. These improvements in third quarter helped UPS to receive significant jump in the fourth quarter. The company, announced diluted earnings per share of $0.75 above the company's expected prediction Due to its strong performance by its International segment, it recorded a substantial gain in volume, operating profit and increase of operating margin by 16.7 %
COMPETITOR ANALYSIS
FedEx were maintaining a fair 15% on the capital employed, it further reduced to 3% for financial year 2009, it is noted asset were impaired resulting to dip in the capital employed, the company recorded $202 million on property and asset impairment and additional $191 million was charged to aircraft impairment reducing the percentage of capital employed. Even the gross profit margin of the company decreased from previous years by 1.3 points.
COMPARISON
UPS over the years had higher profitability ratio, FedEx impaired many of the assets mainly during the last to fiscal years and hence decreasing their profitability margins significantly over the past two years
LIQUDITY
The current asset of the company is competent enough to cover the current liabilities, the company maintains their current liabilities and makes sincere effort to pay their current liabilities. The current ratio was at the highest in 2006 and gradually decreasing during the recession times. This was because the management was taking efforts to pay of their maturing debt which was used for the current running of their operations, the short term borrowings eventually decreased to $ 853,000 to 2,074,000 and 3,512,000 made in 2008 and 2007 respectively. The company restructured their financial plan and borrowings during the economy plunge
COMPETITOR ANALYSIS
FedEx, has a significantly increasing current ratio, making the company look better in paying of their immediate current liabilities but it has to be noted that the debt level of the company is significantly increasing.
COMPARISION
Even though FedEx has a higher current ratio over the years, as mentioned above the debt level has to be monitored. The maturity period of their long term debt is not accounted for the coming years but it is highly visible that debt levels are increasing (2009-1,930 million $, 2010- 1,506 million $) and so is their liability to repay debt and interest.
Activity Ratio
Both the company deals with high volume in cash transactions and the debtors ratio and creditors payout ratio is negligible. The fixed ratio indicates the sales generated by the fixed asset base of the companies; the companies owns large number of fixed assets such as planes, vehicles and plants so the figures shown are highly sensitive to fixed asset
GEARING RATIO
Gearing ratios are a general term describing a financial ratio that compares some form of owner's equity to borrowed funds. It is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. What we can observe here is the change in policy by the company's management. During 2006, 2007 the company's policy to use more of shareholders fund to finance its assets and in later of 2008 the company started employing more of long term debts. Hence the company's long term debt has increased from $ 3,133,000 in 2006 to $ 8,668,000 in 2009. The repercussion includes the rise in interest payment the company has made from $ 211,000 in 2006 to $ 445,000 in 2009. It can be speculated that these large amount of debts which were contributed towards pension and postretirement benefits and the rest were kept as cash. Interest cover shows how many times a company can cover its current interest payment out of current profits and indicates whether servicing debt may be a problem. An interest cover of more than seven is usually regarded as safe and more than three is acceptable. In regard to UPS, the company maintains a ratio far above the thumb rule standards, the low in 2007 was due to the degree of profits made during the year and the company's spending on retirement benefits.
COMPETITORS ANALYSIS
Unlike UPS, FedEx maintains adequate equal amounts of debt and equity. The debt levels over the past four years are constant and this can be seen at their equity levels too.
UPS VS FedEx- SEGMENT ANALYSIS
UPS- DOMESTIC PACKAGE AND INTERNATIONAL
Parcel services within United States generated 62.1% or $28.16 billion of the revenue in 2009. Thhus includes packages up via air and ground delivery, postal letters in the U.S.. UPS seeks to reinforce its position as the leader in U.S. domestic shipping by reducing shipment times and expanding related services. On 29 May 2008, UPS received a successful contact to its core domestic package business. DHL, decided to outsource its air operations to UPS The arrangement is for 10 years and will add an additional $1 billion a year to UPS's revenues.
The recession forced UPS to cut shipping prices substantially. Profit fell by 10% since 2008, and operating margin decreased to 7.6%. The UPS' domestic profit increased over 60% since the optimism after the fourth quarter in 2009. UPS's international package business offers parcel delivery in more than 200 countries and domestic service within 22 countries besides the United States
FedEx EXPRESS- DOMESTIC AND INTERNATIONAL
FedEx offers delivery to every address within the United States and 220 countries and across the world. It offers guaranteed deliveries to arrive at their destination within one to three business days and serves markets that comprises up to 90% of the world's gross domestic product. FedEx Revenue from FedEx's international service-its primary international parcel express service has grown at a rate of more than 14% for the last 8 years. It represents 63% of the company's revenue.
FedEx expanded by acquiring small carriers in valuable markets and by initiating contracts with others, well-known in the industry. FedEx's acquisitions have improvised and the company achieved 10-15% return on invested capital every year since 2000. The company own 22% share in the Asian small-package market hold number 2 position below DHL
UPS-FREIGHT AND SUPPLY CHAIN
UPS earnings for its freight and supply chain management businesses together.It entered the logistics services and ground freight markets in 2004-2005 when it acquired Menlo Worldwide Forwarding and Overnite Transportation, leaders in those markets respectively.UPS Freight, Supply Chain Solutions, and their auxiliary businesses generated $7.44 billion, or 16.5% of UPS's revenue. This is a decrease of 16.5% since 2008. However, as with the previous segments, the recovery from the recession provided an uptick in this segment. In the overall, the operating margin increased to 4.0% from a negative 1.2% in 2008.
FedEx- FREIGHT AND SUPPLY CHAIN
FedEx has identified reliable freight service as an unoccupied niche and established its LTL business with that picture in mind.
FedEx's vision and the brand helped attract its freight customers. The company was formed by the acquisition of two LTL carriers offering service to complementary regions-Western regional carrier Viking (1997) and Eastern/Midwestern carrier American Freightways (2000-2001). Since these acquisitions, FedEx Freight's revenues have grown at a CAGR of 15%. FedEx's share of the regional LTL market is now about 12%, the largest in the market. This year, FedEx will acquire Watkins Motor Lines, a national LTL carrier that will allow FedEx to offer national services for the first time.
UPS-CHALLENGES RECESSION
UPS has passed through twenty one recessions of its existence and a depression in their 101year old history. The management applied the facts learned from their past to guide the company through the recent economic plunge. The management took the required steps to manage the business, while focusing on the long-term objectives of the business.
UPS installed extraordinary and widespread cost management initiatives in 2009. These initiatives involved network changes as well as organizational and structural refurbishment intended to make UPS an efficient organization. In addition to these, the company noticeably
decreased capital expenditures without interfering in development and growth opportunities. UPS successfully cost saved nearly $1.4 billion, while maintaining service levels that are the best in the history. These achievements occurred without diluting any of the company's service foot-print.
Even with a severe recession pressures, UPS maintained and continued highlighting their financial position. The company generated thinned free cash flow, produced $4.1 billion and the company also held its dividend in 2009 at 2008 levels, marking 40 years of maintaining or increasing dividend payments, and substantially increased their dividend in the quarter 1 of 2010.
In spite the heightened focus on cost control and spending pessimism in the markets, UPS did not hesitate to make strategic controlled investments for long term. In 2009,the investments for growth expanded into the foreign markets which included
Expanded Worldport, the largest air hub, in Louisville, KY, enabling the company to process 416,000 packages per hour. With completion of phase two in 2010, it would optimize network by flying fewer, bigger, and more efficient aircraft.
Proceeded with the construction of the air hub in Shenzhen, China, promising to open in the third quarter of 2010.
Acquired service agent in Turkey and established a joint venture in United Arab Emirates, to take advantage of on that area's growing importance as a transportation hub and sourcing location for Europe and Asia.
Opening of 365,000 sq feet of dedicated facilities in Netherlands and Puerto Rico to meet the particular supply chain needs within healthcare sector
Adding 250 new CNG vehicles to the country's largest private fleet of alternative fuel vehicles for the industry
The organizations participation with the international Olympic Games, began in 1996,and has helped in broadening its brand recognition in the global community. In 2009, the company was honored to be selected to manage the transportation and logistical operations of the London Olympic Games in 2012.
Addition to the significant investment in infrastructure and market penetration, UPS expanded
Their initiation of domestic express pickup to focus delivery services in 22 countries, in all 55 countries.
The early morning delivery territory within the United States to more than 23,000 ZIP Codes making UPS delivers earlier to more businesses than any other carrier
Management of healthcare supply chains, which includes package transportation services. Adding Merck's U.S. distribution operation and two facilities to the networks in 2009 and thereby increasing our global healthcare 25 facilities of 3.5 million square feet.
CONCLUSION
I believe that the company can be optimistic about the future; Global trade will be a major stimulus that powers economic and UPS is better positioned than ever to synchronize that trade. While recovery is under way regaining l economic share will be a difficult process. Therefore, 2010 will show gradual improvement over 2009 as the time progresses
I believe this analysis paints the picture of a determined industry underdog who is aggressively managing its company to grow rapidly while increasing profitability. Their overall ROE as a measurement of profitability is steadily improving over time due to improvements in the operational management as measured and investment management as measured by net operating asset turnover. Their aggressive financial management is hurting their ability to use debt more profitably to increase their spread. Instead, they have sought to use the efficiencies in operations and off-balance-sheet contract obligations and equipment leases to finance their operating assets. The aggressive growth and lean financial management has increased the risk of FedEx over competitor UPS, but they are consistently improving their ability to cover interest from both earnings and cash flows. I believe you can expect to see the sustainable growth of this company to continue to improve in future years as they continue to chip away at the industry leader's market share.
RECOMMANDATION
General economic conditions in the U.S. and internationally: International operations and domestic economy are subject to change and are cyclical the company must be able to adapt their business model and mitigate to these factors which causes it.
Effects of changing prices of energy, including gasoline, diesel and jet fuel: Changing fuel and energy costs has significant impact on operations of UPS. The company requires large quantities of fuel for their aircraft and delivery vehicles and is exposed to the risk associated with variations in the market price for these products; the company should maintain or increase the fuel surcharges according to the increase or decrease of fuel prices or it would affect their short term operating cost. The company should consider hedging transactions on fuel.
Changes in exchange rates or interest rates: The management monitors and manages exposures to changes in currency exchange rates and interest rates. The company must limit the use of currency exchange contracts, over the counter option contracts, commodity forwards, swaps and futures contracts to mitigate the impact of changes in currency values
