UPS case study
United Parcel Service’s IPO
Case Talking points
Value of the Knot
We calculated Free Cash Flow and the pre-money NPV based on the same asset beta as we can derive from FedEx’s equity beta. The NPV is 35.4 billion and share price should be $31.5 for the current 1,124,000 share outstanding.
Book Building Price
As the book building data suggest, if we choose under $65/share, demands for the new-issued stock exceed the issuing stocks. Because of that, we recommend a price between:
Multiples Approach for valuation
We also tried to calculate the value with multiple approaches. To be more conscious, we used the “Best of Breed” and applied the P/E ratio to estimate UPS price as the top companies’ whichone are between 50% and 70% higher than the industry average.
Using P/E Ratios FedEx values P/E = 1.0*P/E FedEx $35/share of UPS Best of Breed: P/E = 1.5*P/E FedEx $52/share of UPS P/E = 1.7*P/E FedEx $59/share of UPS
3 different values due to the different approaches
The prices from the different approaches spreadvaried. High book building price suggest that the market expects a higher growth rate in longer- term than the average industry and our estimation. Assuming our 7-year cash flow forecast is the same as the market forecast, the growth rate after 7 years isare expected to be 8.56%, which is almost same as the 30-yr US bond.
On the other hand, the market expects less growth rate forom FedEx (1.02%). The most probable reason for the two different growth rates is because UPS is better than FedEx in the international marketservices, which will grow much higherfaster than the already saturated domestic marketservices.
Exhibit-1 (Cash flow forecast - UPS)
Exhibit-2 (Cash Flow Forecast - FedEx)
FedEx Valuation
1995
1996
1997
1998
1999
Revenue 4,619,990
6,150,247
6,647,140
7,087,728
Pre-tax income
539,959
650,901
Case Talking points
Value of the Knot
We calculated Free Cash Flow and the pre-money NPV based on the same asset beta as we can derive from FedEx’s equity beta. The NPV is 35.4 billion and share price should be $31.5 for the current 1,124,000 share outstanding.
Book Building Price
As the book building data suggest, if we choose under $65/share, demands for the new-issued stock exceed the issuing stocks. Because of that, we recommend a price between:
Multiples Approach for valuation
We also tried to calculate the value with multiple approaches. To be more conscious, we used the “Best of Breed” and applied the P/E ratio to estimate UPS price as the top companies’ whichone are between 50% and 70% higher than the industry average.
Using P/E Ratios FedEx values P/E = 1.0*P/E FedEx $35/share of UPS Best of Breed: P/E = 1.5*P/E FedEx $52/share of UPS P/E = 1.7*P/E FedEx $59/share of UPS
3 different values due to the different approaches
The prices from the different approaches spreadvaried. High book building price suggest that the market expects a higher growth rate in longer- term than the average industry and our estimation. Assuming our 7-year cash flow forecast is the same as the market forecast, the growth rate after 7 years isare expected to be 8.56%, which is almost same as the 30-yr US bond.
On the other hand, the market expects less growth rate forom FedEx (1.02%). The most probable reason for the two different growth rates is because UPS is better than FedEx in the international marketservices, which will grow much higherfaster than the already saturated domestic marketservices.
Exhibit-1 (Cash flow forecast - UPS)
Exhibit-2 (Cash Flow Forecast - FedEx)
FedEx Valuation
1995
1996
1997
1998
1999
Revenue 4,619,990
6,150,247
6,647,140
7,087,728
Pre-tax income
539,959
650,901