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Fedex (FDX) vs. UPS (UPS)

January 16, 2009 | About:
Saj Karsan

Saj Karsan

21 followers
When we looked at the historical book values of FedEx (FDX) and UPS (UPS), it was clear that UPS has always traded at asignificant premium to its book value as compared to FDX. To understand why, one only has to compare the relative returns on equity*

for the two companies: UPS 16.6%, FDX 11.6%. But how UPS manages to generate a higher return on equity may come as a surprise to many.


To demonstrate how UPS generates the higher return on equity (ROE), it's useful to examine the following equation: ROE = Net Income / Equity


ROE can be further broken down into (Net Income / Assets) * (Assets / Equity).


In other words, we can break down a company's return on equity as a combination of its return on assets (Net Income / Assets) and its

use of leverage (Assets / Equity).




But for both FDX and UPS, return on assets sits at 6.3%! This means the major difference between the ROE for these two companies comes from differing uses of leverage. Indeed, the debt to capital ratio for FDX sits at just 13% compared to 44% for UPS. This means UPS hasn't generated its superior returns through better operations, but rather by using cheaper

capital (debt) while taking more risk as a result.


Should UPS pay down its debt so that its risk level isn't so high, or should FDX take advantage of cheaper capital in order to

generate more returns for shareholders? We'll explore these questions in a future post.


*To smooth out fluctations, ratios in this article were taken using the average of the last two fiscal years of each company.

By Barel Karsan, www.barelkarsan.com

About the author:

Saj Karsan
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.

Rating: 2.8/5 (10 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
With the credits markets in their current state there is no "cheaper capital" available to corporate issuers.

While your article has valid facts...

Where is the actionable advice?


augustabound
Augustabound - 5 years ago
stockdocx99 Wrote:

-------------------------------------------------------

> Where is the actionable advice?

Why does an article need actionable advice? Good writers give you facts, maybe an opinion and allow you to form your own judgment.

valueguy007
Valueguy007 - 5 years ago
UPS might have traded at a significant premium to its book value, but how do you know ROE is the right metric or the reason?

My understanding is, the more leverage = lower multiple! Because the investment is perceived to be risky. Goldman Sachs even during its heyday was trading at a P/E of around 9

You might wanna go back to the drawing board on that one!

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