# United Parcel Service Inc. (UPS)

## Present Value of Free Cash Flow to Equity (FCFE)

Medium level of difficulty

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

United Parcel Service Inc., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.36%
01 FCFE0 4,843
1 FCFE1 10,745  = 4,843 × (1 + 121.87%) 9,479
2 FCFE2 20,787  = 10,745 × (1 + 93.45%) 16,177
3 FCFE3 34,307  = 20,787 × (1 + 65.04%) 23,553
4 FCFE4 46,875  = 34,307 × (1 + 36.63%) 28,390
5 FCFE5 50,729  = 46,875 × (1 + 8.22%) 27,104
5 Terminal value (TV5) 1,069,349  = 50,729 × (1 + 8.22%) ÷ (13.36%8.22%) 571,350
Intrinsic value of United Parcel Service Inc.’s common stock 676,054

Intrinsic value of United Parcel Service Inc.’s common stock (per share) \$788.10
Current share price \$119.01

Based on: 10-K (filing date: 2019-02-21).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.12% Expected rate of return on market portfolio2 E(RM) 11.55% Systematic risk of United Parcel Service Inc.’s common stock βUPS 1.19 Required rate of return on United Parcel Service Inc.’s common stock3 rUPS 13.36%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rUPS = RF + βUPS [E(RM) – RF]
= 2.12% + 1.19 [11.55%2.12%]
= 13.36%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

United Parcel Service Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends 3,189  2,928  2,771  2,649  2,487
Net income 4,791  4,910  3,431  4,844  3,032
Revenue 71,861  65,872  60,906  58,363  58,232
Total assets 50,016  45,403  40,377  38,311  35,471
Equity for controlling interests 3,021  1,000  405  2,470  2,141
Financial Ratios
Retention rate1 0.33 0.40 0.19 0.45 0.18
Profit margin2 6.67% 7.45% 5.63% 8.30% 5.21%
Asset turnover3 1.44 1.45 1.51 1.52 1.64
Financial leverage4 16.56 45.40 99.70 15.51 16.57
Averages
Retention rate 0.31
Profit margin 6.65%
Asset turnover 1.51
Financial leverage 38.75

FCFE growth rate (g)5 121.87%

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-27).

2018 Calculations

1 Retention rate = (Net income – Dividends) ÷ Net income
= (4,7913,189) ÷ 4,791 = 0.33

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 4,791 ÷ 71,861 = 6.67%

3 Asset turnover = Revenue ÷ Total assets
= 71,861 ÷ 50,016 = 1.44

4 Financial leverage = Total assets ÷ Equity for controlling interests
= 50,016 ÷ 3,021 = 16.56

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.31 × 6.65% × 1.51 × 38.75 = 121.87%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (102,089 × 13.36%4,843) ÷ (102,089 + 4,843) = 8.22%

where:
Equity market value0 = current market value of United Parcel Service Inc.’s common stock (US\$ in millions)
FCFE0 = the last year United Parcel Service Inc.’s free cash flow to equity (US\$ in millions)
r = required rate of return on United Parcel Service Inc.’s common stock

#### FCFE growth rate (g) forecast

United Parcel Service Inc., H-model

Year Value gt
1 g1 121.87%
2 g2 93.45%
3 g3 65.04%
4 g4 36.63%
5 and thereafter g5 8.22%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 121.87% + (8.22%121.87%) × (2 – 1) ÷ (5 – 1) = 93.45%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 121.87% + (8.22%121.87%) × (3 – 1) ÷ (5 – 1) = 65.04%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 121.87% + (8.22%121.87%) × (4 – 1) ÷ (5 – 1) = 36.63%