The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc. case study examines the financial performance of FedEx Corp. and UPS, Inc., two firms competing in the overnight express package industry. This introduces discussions on corporate value creation and interpretation of results.
Robert F. Bruner and Sean Carr
Harvard Business Review (UV0095-PDF-ENG)
November 17, 2005
Case questions answered:
- What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance?
- Analyze the historical performance of FedEx and United Parcel Service, Inc. in terms of EVA. What are the trends you see? What factors affect this trend? What do you think are the key drivers of EVA?
- Make a projection of the relevant items to estimate the EVA from 2004 to 2006, be clear and consistent with each of your projection assumptions, explain how you arrived at these results and if they are consistent with the context for which both companies are passing.
- Calculate the EVA from 2004 to 2006 using the projections that I estimated in the previous point.
- Interpret the results you found in the previous point. If you have to choose between FedEx and UPS, which one would you choose and why?
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The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc. Case Answers
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This case solution includes an Excel file with calculations.
1.) What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance?
EVA is the value created or destroyed each year by deducting a charge for capital from the firm’s net operating profit after taxes or best known NOPAT. The equation for EVA is:
EVA = Operating Profits – Capital Charge
EVA = NOPAT – (K*Capital)
NOPAT: net operating profit after taxes.
K: Cost of capital or WACC.
Capital: capital employed in the business or operation.
Advantages:
1. EVA gives the value a company generates above the required return on its capital, focusing on the creation of this value. This focus aligns management’s goals with shareholders’ interests by emphasizing long-term value creation.
2. EVA measures how the company is managing its capital investments, if the EVA is positive (EVA>0), this would mean that the company is creating value for the shareholders. This is a good reference for managers to know if they are doing a low-return project.
3. EVA is a measurement that can be used to see if value is created or destroyed inside a hole company, or a specific line of the business and inside a single project.
4. EVA considers both operating performance (NOPAT) and capital efficiency (Capital Charge), making it a more comprehensive measure than metrics like Net Income or Earnings per Share (EPS).
5. EVA can be used as a valuation method, by estimating the Market Value Added (MVA), following these equations:
MVA = Present Value of all future EVA
MVA = Market Value of debt and equity – Capital
Market Value = Capital + Present Value of all future EVA
Disadvantages:
1. There is a risk that managers might focus on short-term EVA improvement instead of a long-term strategy for the hole company, such as R&D or market expansion.
2. EVA is not an absolute measure for analyzing the health of a company, it may not be as effective in industries with significant intangible assets or those where capital investments are not very important. Sometimes having a low NOPAT does not mean that the company is not doing good, but that it is captured in the EVA.
3. When valuing a company through EVA it is difficult to calculate the terminal value of the company, which makes it an incomplete method.
2.) Analyze the historical performance of FedEx and United Parcel Service, Inc. in terms of EVA. What are the trends you see? What factors affect this trend? What do you think are the key drivers of EVA?
Income
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