Competitor Comparison the Companies the Thesis

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This is especially unusual given that the FedEx appears to be weathering the current economic crisis much better than UPS is. They have better control over their cost structure and have been able to reduce their debt. UPS, on the other hand, has more volatile earning and cost figures and has seen a dramatic increase in leverage in recent years. The most likely factor is that UPS pays a much higher dividend. This gives the impression of greater cash flow stability. Yet FedEx has enjoyed a steady rate of dividend increase (2 cents per year). That they do not pay as much as UPS reflects their youth but it is a fallacy to assume that FedEx's future cash flows are less certain. Indeed, their dividend rates going in to the future are entirely predictable.

Despite this, the market appears to prefer UPS' business model to that of FedEx. The latter company is still dependent on air shipping. This is the high-end model for the industry. In difficult economic times the short-term outlook is relatively poor for the air business. Rising fuel prices compromise the long-term viability of this business as well. That said, the fundamentals of FedEx are much stronger, so it is curious why the market has valued the company more poorly that UPS in terms of price-to-book and especially price-to-sales.

Conclusion

Overall, FedEx has the stronger financial performance of the two companies. Over the past five years, they have improved liquidity, lowered their long-term debt and improved their asset management. FedEx has weaker profitability ratios than does UPS, but they are still strong.

Conversely, UPS does not have solid financials across the board. The company's debt management is poor. The dramatic increase in leverage in the past five years has corresponded with a volatile liquidity position. Whereas FedEx has experience stable cash flow from operations, UPS's cash flows have been anything but stable.

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The betas of these companies indicate that historically UPS has had the more stable operation. To some extent, the market still prices these firms based on that rational. However, the ratios of these two firms point to a different picture. UPS has been the more volatile of the two in most respects. The only point of strong consistency is with their gross margins.

On balance, however, the areas where FedEx outperforms UPS it tends to do so substantially. Where UPS outperforms FedEx, it is only marginally. Corporate history is also relevant to this discussion. Both companies came from different segments of the industry. FedEx, the younger of the two, has been the high-flier but is now settling into a mature position where is able to improve its cash and profit positions while simultaneously strengthening its balance sheet. UPS has been in a mature position for much longer, but is starting to show signs of weakness. They maintain a strong competitive position but appear to be less sound operationally than FedEx.

The most relevant points that come from this ratio analysis are with respect to FedEx's apparent stability and UPS's weakening performance. The latter has seen a steep decrease in cash combined with a steep increase in both long-term debt and "other" liabilities. This is consistent with a company that is performing poorly. The other metrics, such as the profitability ratios, do not bear this out, but it is worth nothing that UPS has seen decreasing revenues in recent years. FedEx may have weaker profitability, but the stability of their other ratios and consistent revenue growth show a company that is performing well. This is corroborated by the fact that FedEx has maintained a stable cash position….....

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