Colin Barry

UPS's IPO, Part 1 (BAV, Tuesday, Week 4)


Financial analysis challenge: separate operating effects from financing effects.
Also, I never want to be an equity research analyst (even though this class is actually pretty interesting)

FedEx => All operating leases, reduces net income a little but dramatically understates size of total asset base ($8B in "hidden" assets). On the other hand, impact on ROE is minimal.
Why capital leases make sense: conservative/accurate approach to leverage and firm's ability to take on debt.

One-time events sometimes swamp "real" performance
-- UPS strike kills profitability in one FY
-- FedEx acquisition of RPS dramatically changes cost structure in another FY

Condensing the income statement: four key metrics
-- Sales
-- Net Operating Profit After Taxes (NOPAT) = Net Income + Net Interest Expense (after taxes)
==> Earnings on Net Operating Assets; driven by sales growth
-- Net Interest Expense After Taxes = (Interest Expense -- Interest Income) x (1 -- Tax Rate)
==> After-tax cost of Net Debt; driven by leverage and financing costs
-- Net Income
======> Separates operating net income from effects of capital structure

Condensing the balance sheet: four key components
Total Net Operating Assets
(1) Net Working Capital => minimal economies of scale
(2) Net Long-Term Assets => potential economies of scale

Total Capital (financing)
(3) Net Debt (interest bearing) => drives interest expense
(4) Equity => residual claim on earnings