FedEx Corporation was started in 1997 with the aim of serving as a holding company to the FedEx group of companies. The company offers transport services, e-commerce as well as other business services using companies that compete collectively yet operate independently and collaborated under the FedEx brand name. The companies include four reportable segments which are FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. The company recently realigned its specialty logistics as well as e-commerce solutions in a unique organizational structure under the name FedEx Trade Network. The realignment enhances the ability of the company to deliver the capabilities of its specialty services segments by establishing an organization that is determined to serve the needs of the customers.
Common Size Analysis
FedEx and its close competitor enjoy similar characteristics. The cost of revenue and the gross profits have significant differences with UPS showing impressive performance. However, the operating expenses for FedEx are lower than UPS implying that the total benefits are reduced to a lower figure. The gross profits to revenues for FedEx in 2017 are 22.82%, and the gross earnings for UPS are 71.59%. However, operating incomes for the two companies declined to 8.35% and 11.43% of the total revenue.
Delegate your assignment to our experts and they will do the rest.
UPS figure indicates a substantial decline which can be attributed to higher operating expenses. Other financials like interest expenses, net income and earnings show a similar trend. The following table shows a side by side comparison of the two companies for the year 2017. The net income for FedEx and UPS are 4.97% and 7.45% respectively. Earnings before interest tax and deductions were 13.41% and 15.00% for the two companies.
Both companies show stable financial positions and a growth trend implying that their performance is likely to improve further in the future. Despite the impressive performance and an increase in the key financial indicators in the past five years, FedEx trails UPS as shown by the financial statement. The financial statements show that the company has a high cost of revenue which reduces the gross profits. However, its operating costs are lower than UPS, and therefore the net incomes are comparable to those of UPS. The financial statements show that both companies have strong financial conditions and are stable. The trend indicates that the two can continue enjoying the impressive performance in the market driven by the solid performance in subsequent years. The company must identify their core strengths to compete in the global market and to maintain their current market share.
| FedEx | UPS | ||||
| USD in millions except per share data. | 2014 | 2015 | 2016 | 2017 | 2017 |
| Revenue | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% |
| Cost of revenue | 79.43% | 77.35% | 76.52% | 77.18% | 28.41% |
| Gross profit | 20.57% | 22.65% | 23.48% | 22.82% | 71.59% |
| Operating expenses | |||||
| Sales, General and administrative | 4.62% | 2.97% | 0.04% | 52.51% | |
| Restructuring, merger, and acquisition | 0.58% | ||||
| Other operating expenses | 13.01% | 12.94% | 14.40% | 14.43% | 7.65% |
| Total operating expenses | 13.01% | 18.13% | 17.37% | 14.47% | 60.16% |
| Operating income | 7.56% | 4.52% | 6.11% | 8.35% | 11.43% |
| Interest Expense | 0.35% | 0.50% | 0.67% | 0.85% | 0.69% |
| Other income (expense) | 0.01% | -0.59% | 0.00% | 0.09% | 0.11% |
| Income before income taxes | 7.22% | 3.43% | 5.44% | 7.59% | 10.85% |
| Provision for income taxes | 2.62% | 1.22% | 1.83% | 2.62% | 3.40% |
| Net income from continuing ops | 4.60% | 2.21% | 3.61% | 4.97% | 7.45% |
| Net income | 4.60% | 2.21% | 3.61% | 4.97% | 7.45% |
| Preferred dividend | 0.01% | 0.00% | 0.00% | 0.01% | |
| Net income available to common shareholders | 4.59% | 2.21% | 3.61% | 4.96% | 7.45% |
| Earnings per share | |||||
| Basic | 6.82 | 3.7 | 6.59 | 11.24 | 5.64 |
| Diluted | 6.75 | 3.65 | 6.51 | 11.07 | 5.61 |
| Weighted average shares outstanding | |||||
| Basic | 307 | 283 | 276 | 266 | 871 |
| Diluted | 310 | 287 | 279 | 270 | 875 |
| EBITDA | 13.25% | 9.43% | 11.33% | 13.41% | 15.00% |
Trend Analysis
The financial trend for the company in the last five years shows a stable company with slight changes in its revenues, cost of revenues, and gross profits. The revenues for the company have continued to grow over the years. The revenues increased from $45,657 in 2014 to $65,450 in 2018 indicating impressive performance in the five years under review. The cost of revenues declined in the first three years before reporting a sudden increase in 2017. However, the situation changed in 2018 when the cost of revenue fell. The gross profit has also remained stable throughout the period with the lowest value being recorded in 2014. However, the rest of the years reported a steady gross profit of approximately 22.4% of 2016 was slightly different with the company reporting a higher gross profit of 23.48%.
Most of the company's expenses have remained stable in the four years. The operating profits for the five years also stayed stable with 2015 recording a slightly lower value compared with the rest of the years. 2017 had the highest operating income followed closely by 2018 then 2014 and 2016 in that order. The interest expense has continued to rise with 2014 recording the lowest value and 2018 having the highest interest expense. The net income for the five years was also relatively stable with 2015 having the smallest amount followed by 2016 then by 2014. 2018 reported the highest income in the period under review. Basic and diluted earnings reported a similar trend with 2018 recording the highest values and 2015 having the lowest figures.
Data in the balance sheet shows that the current assets have continued to decline over the years from a high of 29.28% in 2014 to 25.49% in 2018. However, the total noncurrent assets have continued to grow in the five years from 70.72% in 2014 to 74.51% in 2018. The current liabilities have also continued to grow from 16.06% in 2014 to 18.40% in 2018. The total noncurrent liabilities have also reported a similar trend with 2014 having the lowest value followed by 2015 then by 2018 and 2017 in that order. 2016 had the highest total noncurrent assets. Common stock, additional paid-in capital, and retained earnings declined in their value since 2014.
Cash flows from operating activities showed an increase in 2014 to 2016 before it started to decline in the following years. Similarly, cash flows for investing activities indicate that more investments were made in 2016. Financing activities show that 2016 had the highest value followed by 2015 then by 2017 and 2018 in that order. The lowest value was reported in 2014. The analysis shows that the company is experiencing robust growth and is likely to maintain the trend if the prevailing market conditions persist.
Financial Ratio Analysis
| 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | TTM | |
| Revenue USD Mil | 45,567 | 47,453 | 50,365 | 60,319 | 65,450 | 67,205 |
| Gross Margin % | 20.6 | 22.6 | 23.5 | 22.8 | 22.4 | 22.2 |
| Operating Income USD Mil | 3,446 | 2,143 | 3,077 | 5,037 | 5,250 | 5,350 |
| Operating Margin % | 7.6 | 4.5 | 6.1 | 8.4 | 8 | 8 |
| Net Income USD Mil | 2,097 | 1,050 | 1,820 | 2,997 | 4,572 | 4,811 |
| Earnings Per Share USD | 7.48 | 3.65 | 6.51 | 11.07 | 16.79 | 17.7 |
| Dividends USD | 0.6 | 0.8 | 1 | 1.6 | 2 | 2.8 |
| Payout Ratio % * | 11.4 | 6.9 | 26.3 | 20.4 | 11.5 | 15.8 |
| Shares Mil | 310 | 287 | 279 | 270 | 272 | 271 |
| Book Value Per Share * USD | 53.35 | 56.69 | 53.96 | 56.6 | 71.05 | 72.76 |
| Operating Cash Flow USD Mil | 4,264 | 5,366 | 5,708 | 4,930 | 4,674 | 4,785 |
| Cap Spending USD Mil | -3,533 | -4,347 | -4,818 | -5,116 | -5,663 | -5,798 |
| Free Cash Flow USD Mil | 731 | 1,019 | 890 | -186 | -989 | -1,013 |
| Free Cash Flow Per Share * USD | 2.5 | 4.18 | 2.66 | -1.81 | -6.9 | |
| Working Capital USD Mil | 4,371 | 4,984 | 3,981 | 4,710 | 3,714 | |
| Key Ratios -> Profitability | ||||||
| Margins % of Sales | 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | TTM |
| Revenue | 100 | 100 | 100 | 100 | 100 | 100 |
| COGS | 79.43 | 77.35 | 76.52 | 77.18 | 77.56 | 77.8 |
| Gross Margin | 20.57 | 22.65 | 23.48 | 22.82 | 22.44 | 22.2 |
| SG&A | 4.62 | 2.97 | 0.04 | 0.02 | ||
| R&D | ||||||
| Other | 13.01 | 13.52 | 14.4 | 14.43 | 14.41 | 14.24 |
| Operating Margin | 7.56 | 4.52 | 6.11 | 8.35 | 8.02 | 7.96 |
| Net Int Inc & Other | -0.34 | -1.09 | -0.67 | -0.76 | -1.37 | -1.31 |
| EBIT Margin | 7.22 | 3.43 | 5.44 | 7.59 | 6.65 | 6.65 |
| Profitability | 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | TTM |
| Tax Rate % | 36.24 | 35.46 | 33.58 | 34.55 | ||
| Net Margin % | 4.59 | 2.21 | 3.61 | 4.96 | 6.98 | 7.15 |
| Asset Turnover (Average) | 1.37 | 1.35 | 1.21 | 1.27 | 1.3 | 1.33 |
| Return on Assets % | 6.28 | 2.99 | 4.37 | 6.33 | 9.05 | 9.49 |
| Financial Leverage (Average) | 2.16 | 2.47 | 3.34 | 3.02 | 2.7 | 2.7 |
| Return on Equity % | 12.81 | 6.92 | 12.64 | 20.05 | 25.73 | 26.85 |
| Return on Invested Capital % | 10.81 | 5.63 | 8.12 | 11.27 | 15.08 | 14.16 |
| Interest Coverage | 21.56 | 7.92 | 9.15 | 9.94 | 8.8 | |
| Key Ratios -> Growth | ||||||
| 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | Latest Qtr | |
| Revenue % | ||||||
| Year over Year | 2.89 | 4.14 | 6.14 | 19.76 | 8.51 | 11.47 |
| 3-Year Average | 5.05 | 3.6 | 4.38 | 9.8 | 11.31 | |
| 5-Year Average | 5.12 | 6.44 | 5.08 | 7.16 | 8.13 | |
| 10-Year Average | 6.31 | 4.92 | 4.54 | 5.53 | 5.6 | |
| Operating Income % | ||||||
| Year over Year | 7.32 | -37.81 | 43.58 | 63.7 | 4.23 | -4.12 |
| 3-Year Average | -23.8 | -37.34 | -1.41 | 13.49 | 34.81 | |
| 5-Year Average | -13.42 | -20.72 | -16.95 | -10.37 | 10.33 | |
| 10-Year Average | 29.63 | -3.93 | ||||
| Net Income % | ||||||
| Year over Year | 34.34 | -49.93 | 73.33 | 64.67 | 52.55 | |
| 3-Year Average | 13.03 | -19.75 | 5.25 | 12.64 | 63.29 | |
| 5-Year Average | 84.53 | -2.37 | 4.62 | 8.08 | 23.98 | |
| 10-Year Average | 9.61 | -3.17 | 0.08 | 4.04 | 15.05 | |
| EPS % | ||||||
| Year over Year | 37.47 | -45.93 | 78.36 | 70.05 | 51.67 | 41.55 |
| 3-Year Average | 13.88 | -17.11 | 9.86 | 17.93 | 66.31 | |
| 5-Year Average | 85.18 | -0.59 | 7.33 | 11.55 | 27.88 | |
| 10-Year Average | 9.36 | -2.54 | 1.11 | 5.5 | 16.65 | |
| Key Ratios -> Cash Flow | ||||||
| Cash Flow Ratios | 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | TTM |
| Operating Cash Flow Growth % YOY | -9.04 | 25.84 | 6.37 | -13.63 | -5.19 | |
| Free Cash Flow Growth % YOY | -44.33 | 39.4 | -12.66 | |||
| Cap-Ex as a % of Sales | 7.75 | 9.16 | 9.57 | 8.48 | 8.65 | 8.63 |
| Free Cash Flow/Sales % | 1.6 | 2.15 | 1.77 | -0.31 | -1.51 | -1.51 |
| Free Cash Flow/Net Income | 0.35 | 0.97 | 0.49 | -0.06 | -0.22 | -0.21 |
| Key Ratios -> Financial Health | ||||||
| Balance Sheet Items (in %) | 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | Latest Qtr |
| Cash & Short-Term Investments | 8.79 | 10.15 | 7.67 | 8.17 | 6.24 | 4.56 |
| Accounts Receivable | 16.51 | 15.43 | 15.74 | 15.65 | 16.21 | 16.79 |
| Inventory | 1.4 | 1.34 | 1.08 | 1.06 | 1 | 1.01 |
| Other Current Assets | 2.58 | 2.59 | 1.53 | 1.12 | 2.04 | 1.99 |
| Total Current Assets | 29.28 | 29.52 | 26.03 | 26.01 | 25.49 | 24.36 |
| Net PP&E | 59.12 | 56.31 | 52.72 | 53.51 | 53.8 | 55.45 |
| Intangibles | 8.44 | 10.28 | 16.84 | 15.82 | 14.24 | 13.23 |
| Other Long-Term Assets | 3.17 | 3.89 | 4.42 | 4.65 | 6.46 | 6.96 |
| Total Assets | 100 | 100 | 100 | 100 | 100 | 100 |
| Accounts Payable | 5.96 | 5.57 | 6.39 | 5.67 | 5.69 | 5.91 |
| Short-Term Debt | 0.05 | 0.06 | 0.05 | 2.56 | 3.28 | |
| Taxes Payable | 1.03 | 0.88 | 0.68 | 0.58 | 0.64 | |
| Accrued Liabilities | 7.76 | 8.19 | 8.51 | 8.4 | 7.72 | 9.32 |
| Other Short-Term Liabilities | 1.31 | 1.37 | 1.75 | 1.61 | 1.78 | |
| Total Current Liabilities | 16.06 | 16.07 | 17.38 | 16.31 | 18.4 | 18.51 |
| Long-Term Debt | 14.32 | 19.56 | 30.04 | 30.71 | 29.13 | 29.37 |
| Other Long-Term Liabilities | 23.42 | 23.93 | 22.65 | 19.88 | 15.37 | 15.18 |
| Total Liabilities | 53.8 | 59.55 | 70.08 | 66.9 | 62.9 | 63.06 |
| Total Stockholders' Equity | 46.2 | 40.45 | 29.92 | 33.1 | 37.1 | 36.94 |
| Total Liabilities & Equity | 100 | 100 | 100 | 100 | 100 | 100 |
| Liquidity/Financial Health | 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | Latest Qtr |
| Current Ratio | 1.82 | 1.84 | 1.5 | 1.59 | 1.39 | 1.32 |
| Quick Ratio | 1.58 | 1.59 | 1.35 | 1.46 | 1.22 | 1.15 |
| Financial Leverage | 2.16 | 2.47 | 3.34 | 3.02 | 2.7 | 2.7 |
| Debt/Equity | 0.31 | 0.48 | 1 | 0.93 | 0.79 | 0.79 |
| Key Ratios -> Efficiency Ratios | ||||||
| Efficiency | 2014-05 | 2015-05 | 2016-05 | 2017-05 | 2018-05 | TTM |
| Days Sales Outstanding | 42.07 | 42.99 | 47 | 44.93 | 44.84 | 45.41 |
| Days Inventory | 4.64 | 4.78 | 4.71 | 3.96 | 3.74 | 3.63 |
| Payables Period | 19.41 | 20.07 | 23.72 | 22.33 | 20.6 | 20.96 |
| Cash Conversion Cycle | 27.3 | 27.7 | 27.98 | 26.56 | 27.98 | 28.08 |
| Receivables Turnover | 8.68 | 8.49 | 7.77 | 8.12 | 8.14 | 8.04 |
| Inventory Turnover | 78.68 | 76.39 | 77.54 | 92.19 | 97.71 | 100.64 |
| Fixed Assets Turnover | 2.4 | 2.35 | 2.23 | 2.4 | 2.42 | 2.44 |
| Asset Turnover | 1.37 | 1.35 | 1.21 | 1.27 | 1.3 | 1.33 |
Source: Moningstar.com
Graphs
Liquidity Ratio
Profitability ratios
Liquidity ratios show that FedEx has adequate liquidity to cover for its near cash needs. The company has a healthy current ratio and quick ratio. Similarly, financial leverage shows that the company has a strong performance which is critical for its long-term growth. The liquidity ratios, however, show a declining trend implying that the company's efficiency needs to be evaluated to determine the cause of the decline. A further reduction in these ratios can lead to liquidity problems that can affect the performance of the company in the future.
Efficiency ratios show that the company is efficiently managing its inventory, cash, and receivables. FedEx shows a strong position in this area that needs to be enhanced further to boost its future growth. Most of the ratios in this category are showing a growing trend which is good for the company. The day’s sales outstanding however need to be improved since it is showing that the trend is moving in the wrong direction. The current standing of the company is however good and needs to be maintained in future. The cash conversion cycle has alos remained stable throughout the period. The company is converting its cash quickly which indicates that it is efficient in its operations and therefore unlikely to face liquidity issues. However, the company faces some challenges in the way it manages its cash flows.
The operating cash flow growth shows that FedEx should enhance its cash collection. Receivable turnover has also remained stable throughout the period under review. The inventory turnover has increased in the period under review from 78.68 in 2014 to 97.71 in 2018 an indication that the company has strong sales or is maintaining low inventory which is good for the company. Asset turnover remained stable in the period under review an indication that the net sales of the company are higher than the total assets throughout the period. Efficiency rations therefore indicate that the company is properly using its assets to generate more revenue for its shareholders.
Growth rations indicate that the company continues to report impressive growth over time. Most of the averages including the three years, the five years and the ten years show remarkable performance. Year over year revenues shows impressive performance in the five year which is similar to the three year and five year average. The same trend was reported by a ten year average. The operating income also shows an expanding trend for the three, five and ten year period. However, the company recorder negative values in 2015 affecting the operating income for that year. The data for the other years shows a stable positive operating income.
The net income as a percentage indicates that the company is performing well. The company reported slight growth in the period under review. The company however reported negative net income in 2015 affecting the values for the year over year growth, three years average, five years average and ten year average. The rest of the years maintained a positive outlook.
Earnings per share for the five years also showed impressive performance. However, 2015 reported negative EPS driven by the negative income reported by the company in that year. The rest of the years recorded positive values and slight variation over the years.
According to the ratio analysis, the company should maintain the current strategies to continue generating more profits. However, it should strive to increase its asset turnover ratio by generating more sales from the existing company assets. Similarly, the company can try to boost its profit margins by reducing its operating cost or increasing its revenues.
Return on Equity using DuPont Analysis
According to the ratio analysis, the return on equity for the five years is 12.81, 6.92, 12.64, 20.05 and 25.75. The net profit margins are 4.59, 2.21, 3.61, 4.96 and 6.98. Asset turnover for the period is 1.37, 1.35, 1.21, 1.27 and 1.3. The financial Leverage is 2.16, 2.47, 3.34, 3.02 and 2.7.
Return on Equity = (Net Profit margin)*(Asset turnover)*(Equity multiplier)
| 2014 | 2015 | 2016 | 2017 | 2018 | |
| Profit Margin | 4.56 | 2.21 | 3.61 | 4.96 | 6.98 |
| Asset turnover | 1.37 | 1.35 | 1.21 | 1.27 | 1.3 |
| Financial Leverage | 2.16 | 2.47 | 3.34 | 3.02 | 2.7 |
| ROE | 13.493952 | 7.369245 | 14.58945 | 19.02358 | 24.4998 |
The following ratios relate to UPS for 2017 Net profit margin 7, asset turnover 1.54 and financial leverage 45.4.
| 2017 | |
| Profit Margin | 7.45 |
| Asset turnover | 1.54 |
| Financial Leverage | 45.4 |
There are differences between profit margins, asset turnover and financial leverage between FedEx and UPS. UPS has a slightly higher profit margin and asset turn over but the financial leverage shows a significant difference in the two major companies. FedEx ROE has significantly improved in the last three years. The increase can be attributed to the profit margins which have also reported an increase in the three years.
According to the ROE using DuPont, 2014, 2015 and 2016 had higher values compared to the ROE using the normal approach. However 2017 and 2018 recorded slightly lower return on equity using the DuPont model. The asset turn over might have affected the ROE in the two years since it has reported a decline in 2017 and 2018. Despite the increase in profit margins and the asset multipliers, the DuPont was lower than the return in equity computed earlier.
The management should strive to improve the ROE for the company by enhancing its profit margins. This can be achieved by increasing the revenues of the company and also reducing operational costs. Similarly, the company can invest in other high income generating activities that boost the returns on equity.
Recommendations
The financial analysis shows that the company is in a stable condition which can guarantee improved performance in future. Similarly, the company is expected to be financially sustainable in the next three years driven by the current growth and the fundamentals held by the company. The company shows impressive financial performance, however, there are areas that need to be improved in future. The management should focus on improving the profit margins of the company by engaging in cost leadership strategies and improving efficiency. Similarly, some of the weak areas pointed out throughout the analysis should be addressed.
Reflection
The assignment was an eye opener since it exposed the student to financial analysis of a real company and the different tools that can be used to analyse the company. Similarly, it has enhanced the ability of the student to use the learned knowledge to conduct a comprehensive analysis and to recommend appropriate measures that should be taken by the company for its success.
References
Lumby, S. (2015). Corporate Finance . Cengage Textbooks.
Morningstar. (2018). FDX FedEx Corp Stock Quote Price | Morningstar. Retrieved from https://www.morningstar.com/stocks/xnys/fdx/quote.html
Yahoo Finance. (2018). FedEx Inc. Retrieved from https://finance.yahoo.com/quote/FDX/financials
