TRANSPORTATION INDUSTRY Security Analysis Student Managed Investment Portfolio ClassProf. P.V. ViswanathSpring 2002
ANALYSTS • ELLEN MATUSHANSKY • KENLEE ABRAHAM • WAYNE LEE • ERNEST R. LARENAS
CRITERIA FOR STOCK SELECTION • Transportation industry-wide selection • Create a unique list from S&P 1500 Super Composite, Yahoo Finance, and Multex. • Financial Information obtained from StockVal, Bloomberg and Multex. • Select stocks with positive Cash Flow. • Select companies with a market value greater than $1 billion market cap.
CRITERIA FOR COMPANY SELECTION • Each stock was ranked using the following ratios: • FCF/MVA • DEBT/EQUITY • CFFO/PRICE • FCF/SALES • FCF/CAPEX • Ratio Normalization includes FCF/MVA, Debt/Equity, and Residuals (CapEx) weighted evenly to select stocks based on ratio levels in different sectors
CRITERIA FOR COMPANY SELECTION • Multiply rankings to find the product of the following: • FCF/MVA • DEBT/EQUITY • RESIDUALS Note: assigning a weight to each ranking product did not change the outcome of the final 9 stocks selection • The final four stocks were selected based on the analyst’s knowledge and growth potential of the each corporation.
FINAL CUT • United Parcel Services (UPS) - Trucking • C.H. Robinson Worldwide (CHRW) - Misc. Transportation (Logistics) • Atlantic Coast Airlines Holdings (ACAI) - Airline • Expeditors International of WA (EXPD) - Misc. Transportation (Logistics)
TRANSPORTATION SECTOR Overview
Near Term Concerns • Domestic and international economies weakness, jet fuel and diesel prices, rational industry wide pricing, increased insurance cost and safety concerns benefit some firms and leave others exposed • The outlook for the air freight sector continues to remain weak with no signs of near term recovery.
Air Freight • Non asset base carriers tend to use commercial airlines over competing integrated carriers, US Bancorp believe it is important to consider the industry volumes excluding the integrated carriers. Therefore, to get a good picture of the heavy air freight environment, the package volumes for FEDEX and UPS should be excluded. When this is done, air freight volume for 2002 declines 25.6%/ y/y.
Economic Recovery • US Bancorp believes that if the economy does improve in the 2H02 to expect to see a modest improvement in air freight volumes. This improvement may be held back somewhat by a slow recovery in high tech products. Also, shippers will be hesitant to use air freight in a modestly improving economy as they will continue to be focused on cost savings and will look for low cost modes of transportation.
TOP SELECTION • We are recommending UPS as a Long Term Buy based on the following information
United Parcel Services (UPS) • United Parcel Service Inc. (UPS) is an express carrier, package delivery company and a global provider of specialized transportation and logistics services. • Company's primary business is the time-definite delivery of packages and documents throughout the United States and in over 200 other countries.
Management • 12 member management committee • Corporate culture that stresses teamwork over individuality • CEO: Michael Eskew, An industrial engineer by training • Firm’s top strategist. • Daily Ops: Thomas Weidemeyer, a lawyer honed operational skills by launching UPS Latin America. • Also built UPS’s global air network and still serves as its president. • Senior VP: Joseph Pyne, started as Parcel sorter (1969), main architect of UPS worldwide marketing strategy (1990’s) • Currently oversees non-package units, UPS Logistics Group and UPS capital.
Operations • Started Ops in 1907 (foot & Bicycle) • Today unified air and ground network delivers 14M daily to 200 + countries. • Precision oriented Firm (pinky key) • Domestic delivery “Cash Cow” produce ~ 80% UPS’s rev. • Op margins fell during recession to 15% • Intl Ops ~ 14% UPS’s rev. • Op margins have fallen sharply to barely 2%. • Profitable in Europe and expanding throughout Asia.
Change on the Margin • Most flexible Domestic op margin in industry. • 1/3 of 370K workers part-timers. • Union contract clause: slow=option send home • Technology innovations helps to improve margins. UPS employs 4K tech workers and invest $1B+ yearly on InfoTech (almost as much Aircraft). • VC division holds stake in 12+ Firms developing potentially lucrative technologies. • E.g.: Rf package labels (easier tracking than bar codes)
Strategic Initiatives • Parcel delivery service ($60B) • Logistics market ($75B, $130B in 5yrs) • UPS Logistics rev (3%) ~ $1.4B ($3B-$4B 5yrs) • Grow biz thru acquisitions (20 since IPO)
Growth Vehicles • Fritz Companies(2001, CA) premier int’l freight Forwarder (expertise customs clearance) • UPS Logistics more valuable to customers. • Deliveries, stocking inventories, filling orders, & transporting goods. • Microsoft of Parcel deliveries?
Financial Services • UPS financial Services in early stages. • AAA credit rating and FCF ~$2B this yr. • Loans Safety Net: loans collateralized by A/R or Inventories. • First Int’l Bancorp (2001, CT) extends loans backed by SBA & Export-Import Bank.
Competition: HOME DELIVERY • U.S. Postal Service: lower price, lower quality • FedEx: invented overnight air delivery. UPS seized nearly 1/3 air biz. FedEx seized only 1/10th home-delivery biz (hasn’t posted profit yet on it). • UPS higher profit margins. Better at costs control and managing revenue mix.
Int’l Delivery Markets & Global Logistics Market • INT’L • DHL Worldwide Express dominant player. • LOGISTICS MARKET • FedEx (not interested?) • Deutsche Post (DHL partner) pushing into U.S. • Exel (Britain’s) • TNT Post Group (Netherlands’)
Social Responsibility • UPS domestic trucks uses compressed Natural Gas. • Canada & Mexico trucks fueled by Propane. • UPS foundation donated $40M last year.
Upside • Economy recovery boosts UPS’s bottom line. • Logistics Firms Counter cyclical? • Smoother revs thru diversification.
Downside • Biggest risk is prolonged recession. • Union Contract expires July 2002. • Int’l Brotherhood Teamsters 15 day strike (1997) • Contracts renegotiated every 5 yrs
UPS StockPrice & Volume • Recent Price $ 60 • 52 Week High $61.55 • 52 Week Low $ 46.15 • Avg Daily Vol (Mil)1.57 • Beta 0.66
2-stage FCFE Discount Model Analysis on UPS: Inputs • Current EPS: $2.2 • Current Dividend/share: $0.76 • Current Capex/share: $1.9 • Current Deprec/share: $1.0 • Current Revenue/share: $27.0 • Forward Beta: 0.89 • ROC: 21.3% • D/E: 30.6%
2-stage FCFE Discount Model Analysis on UPS: Outputs • Cost of Equity: 8.9% • Current EPS: $2.2 • EPS Growth rate (rapid phase): 16.7%* • Working Capital as % of Revenue: 15.6% • Fair Value of Stock: $91.5 (currently at $60.8) • *same growth rate in capex, deprec & revenues
Fair Valuation • Recent price $60. • 25X 2002 estimate of $2.24 • Analysts Expects 15% in 2003. • UPS trading premium to FedEx & S&P. • UPS higher ROE, profits, and FCF. • FCFE model $70/share • Change on margin • Higher margin logistics & financing contributes more to future rev. • Hold 3-5 yrs easily outperform market.
Conclusion • Change of margin • Multiple Growth areas • Stability • Infrastructure in place UPS Airlines (9th largest U.S./11th Worldwide)
Other firms Considered • We also looked at these firms, but after a thorough analysis decided it wasn’t in our best interest to recommend.
C.H. Robinson Worldwide (CHRW) • C.H. Robinson Worldwide, Inc. is global provider of multi-modal transportation services and logistics solutions through a network of 139 offices in 40 states and internationally.
CHRW Management • Verdoorn, D.R.Chairman of the Board. Expected to Retire in 2002. • Wiehoff, John P.President, Chief Executive Officer. Expected to replace Mr. Verdoorn. • Butzow Barry W.Senior Vice President, Office of the President and Director.
CHRW StockPrice & Volume • Recent Price $ 34.45 • 52 Week High $35.15 • 52 Week Low $ 24.05 • Avg Daily Vol (Mil) 0.33 • Beta 0.29
Expeditors International of WA (EXPD) • EXPD is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight.
EXPD - Management • Peter Rose, Chairman/CEO • Glen M. Arger, President • R. Jordan Gates, Sr. VP/CFO/Treas. • David Lincoln, Sr. VP/CIO • Jeffrey King, Sr. VP/Counsel/Secy. • Charles Lynch, VP/Contr.
EXPD StockPrice & Volume • Recent Price $ 58.57 • 52 Week High $65.92 • 52 Week Low $ 41.95 • Avg Daily Vol (Mil) 0.34 • Beta 1.43
Atlantic Coast Airlines Holdings, Inc. (ACAI) • Atlantic Coast Airlines Holdings, Inc. is the holding company of Atlantic Coast Airlines, a regional airline serving 53 destinations in 24 states in the Eastern and Midwestern United States.
ACAI - Management • K. Skeen, Chairman/CEO • T. Moore, President/COO • R. Surratt, CFO/Exec. VP/Treas. • R. Kennedy, VP/Counsel/Secy.
ACAI StockPrice & Volume • Recent Price $ 24.05 • 52 Week High $ 30.23 • 52 Week Low $ 8.04 • Avg Daily Vol (Mil) 0.50 • Beta 1.39