Industry: Energy and Utilities

November 20, 2008

Industrial: Air Freight and Logistics

Henry Fund Research

FedEx Corp. (FDX)

Investment Recommendation

Hanu Shyam Mehrotra & Sumit Mundhra [email protected] & [email protected]

HOLD

Current Price

$60.91

Target Price

$87.40

INVESTMENT THESIS  (+)FedEx is the clear market leader in express shipping, with 49% market share in the U.S. In ground shipping, it has started to establish itself in a market dominated by competitor UPS. In its freight businesses too, FedEx is gaining market share but its long-term success is uncertain.  (+)FedEx revenues and margins are expected to expand driven by higher contribution from high margin international shipments and improved productivity. Source: http://finance.yahoo.com

Key Stock Statistics 52-Week Price Range

$101.53-53.90

Market Capitalization (B)

$18.96

Shares Outstanding (M)

311.24

Institutional Ownership

75.86%

60-Month Beta

0.85

Dividend Yield

0.44%

Price/Earnings (ttm)

17.50

Price/Book

1.17

Price/Sales

0.46

ROA (ttm)

6.8%

ROE(ttm)

13.7%

Projected 5-Year Growth

12.83%

EPS ($) Year EPS

2006 1.49

2007 1.99

2008E 2.19

2009E 2.63

2010E 2.88

2011E 3.27

All earnings represent earnings from operations and have been filtered from net nonrecurring gains.

 (+)Global delivery company DHL‘s discontinuation of air and ground operations in US. We feel that this bodes well for the FedEx as it gives it an opportunity to acquire DHL‘s share of business and grow its top line through increased revenues.  (+)Reduced oil and jet fuel prices continue to help FedEx as it is able to share these fuel savings with its customers and thus price its services at a competitive rate.  (-)Slow economic growth in the US has negatively impacted FedEx business and may further slow down growth in the domestic Express, Ground and Freight segments, as the transportation industry is closely correlated to GDP.  (-)FedEx is currently involved in legal review of the classification of its independent contractors at FedEx Ground. A change in FedEx Ground‘s owner operator model could both constrain the segment‘s growth potential and impact its operating ratio.

Valuation Models Discounted Cash Flow

$87.40

Economic Profit

$87.40

Dividend Discount Model

$80.24

l

Important disclosures appear on the last page of this report.

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COMPANY DESCRIPTION

economy and persistently higher fuel prices and the related impact on fuel surcharges have restrained FedEx Corporation provides transportation, e- demand for these services. These factors drove U.S. commerce and business services to customers and domestic shipping levels to pre-2000 volumes during business around the world. These include providing the fourth quarter of 2008. global time-definite air express services for packages, documents and freight; ground based delivery of small packages in North America, expedited critical shipment delivery, customs brokerage solutions, less-thantruckload freight transportation, and customized logistics. FedEx acquired Kinko‘s in February 2004, which operates about 1200 copy centers and also provide business services. FedEx Corporation has annual revenues of above $38 billion and operates in 220 countries worldwide. The company operates in four different segments: FedEx Express, FedEx Ground, FedEx Freight and FedEx Services.

Revenues by Segment 2008 FedEx Express

Source: Company Annual Report

FedEx Ground

FedEx experienced an increase in composite package yield in 2008 which was driven by increases in IP and U.S. domestic yields, partially offset by decreased 13% 5% international domestic yield. IP yield increased 7% in 2008, primarily due to favorable exchange rates, higher 18% fuel surcharges and increases in package weights. U.S. 64% domestic yield increased 4% in 2008 primarily due to higher fuel surcharges and general rate increases. International domestic yield decreased 18% during Source: Company annual Report 2008 as a result of the inclusion of lower-yielding services from the companies acquired in 2007. 1.) FedEx Express Composite freight yield increased in 2008 due to the FedEx Express offers package delivery to every impact of changes in service mix, higher fuel address in the U.S. and to more than 220 countries and surcharges and favorable exchange rates. territories. Express services offered range from ―First Overnight‖—for next day delivery by 8 a.m.--to three We expect limited base revenue growth at FedEx day ―Express Saver‖ service, which is often no faster Express in 2009, as we expect no significant than ground service. Slower express services differ improvement in the U.S. economy in the short term. from ground service in that they are time-definite. For These factors will continue to pressure yields and each, arrival time is guaranteed and rates vary volumes in both U.S. domestic package and freight according to the distance a package travels. FedEx services. However, FedEx is expected to experience Express is the world‘s largest express transportation some revenue growth in 2009 due to the continued company and by far the largest FedEx company. FedEx expansion of China domestic service as well as Express earned $24.4 billion of FedEx‘s $37.9 billion for increases in Canadian domestic package services. year ended in May 31 2008. Also, FedEx‘s international acquisitions have done well FedEx Express revenues increased 8% in 2008, in the past, and the company has achieved 10-15% primarily due to increases in fuel surcharges, growth in return on invested capital every year since 2000. IP volume and the impact of favorable currency FedEx‘s current network covers the largest emerging exchange rates. Revenue increases during 2008 were markets. FedEx currently offers more flights to China partially offset by decreased volumes in U.S. domestic than any other American carrier and has about 22% package and freight services, as the weak U.S. share in the Asian small-package market, more than FedEx Freight

FedEx Services

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any carrier except DHL, which has 32% share. In November 2007 FedEx announced the opening of a new branch in Huzhou, China. This market however, is growing very quickly and the opening of this branch reflects FedEx's goal to expand into growing markets internationally. 2.) FedEx Ground FedEx Ground Package Systems (FedEx Ground) serves customers in the North American small-package market, focusing primarily on business and residential delivery of packages weighing up to 150 pounds. FedEx Ground offers ground services for delivery of small-packages. Ground services are provided through out the US and Canada. Overnight delivery, up to 400 miles, is offered to most of the US. FedEx Ground operates a multiple hub-and-spoke sorting and distribution system consisting of 520 facilities and 30 hubs in the US and Canada. FedEx Ground conducts its operations primarily through 22,000 owner-operated vehicles and 29,500 company-owned trailers.

Source: Company Annual Report A key trend to note is the online retail trend. This trend has been extended by the explosive growth of online retailing. 1Online retail sales exceeded $100 billion in 2003 and have grown at more than 20% annually since then. FedEx offers delivery to nearly every residential address in the United States. Its exclusively residential Home Delivery network also offers Saturday and evening deliveries. Home Delivery service positions FedEx to capitalize on the expansion of online retail sales. FedEx management expects to benefit from this trend and noted recently that the number of Americans with at-home internet access increased from 5 million to 73 million between 2000 and 2005.

In 2005, FedEx Ground acquired FedEx SmartPost, Inc., which focuses on the consolidation and delivery of business-to-consumer packages using the United States Postal Services for final delivery to residences. Catalogue companies and e-tailers are the major customers for FedEx SmartPost Inc. FedEx Ground segment revenues increased 12% during 2008 due to volume and yield growth. Volume growth at FedEx Ground resulted from market share gains and the customer appeal of our cost-effective alternative to overnight air delivery services. Average daily volumes at FedEx Ground increased 8% during 2008 due to increased commercial business and the continued growth of our FedEx Home Delivery service. Yield improvement during 2008 was primarily due to the impact of general rate increases, higher extra service revenue (primarily through our residential, additional handling and large package surcharges) and higher fuel surcharges, partially offset by higher customer discounts and a lower average weight and zone per package.

We expect the FedEx Ground segment to have continued revenue growth in 2009 though at a reduced rate, led by increased commercial business and the continued growth of its FedEx Home Delivery service. FedEx SmartPost volumes are also expected to grow, due to market share gains and improved service levels. Yields for all services at FedEx Ground are expected to improve in 2009 as a result of increases in list prices and fuel surcharges. 3.) FedEx Freight FedEx Freight provides Less-Than-Truckload (LTL) freight services through its FedEx Freight business (regional next-day and second-day and interregional LTL freight services), its FedEx National LTL business (long-haul LTL freight services) and its FedEx Freight Canada business. FedEx Freight provides regional LTL freight service to all US zone improvement plan (ZIP) codes, including Alaska and Hawaii. FedEx Freight also offers a premium service between all regions in the US. Internationally, FedEx Freight serves Canada, Mexico, 1

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www.wikinvest.com

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Henry B. Tippie School of Management South

America,

the despite the continued contraction of the LTL industry resulting from the weak U.S. economy. We expect operating income and operating margin growth to be FedEx Custom Critical provides a time-specific freight- constrained in 2009 due to the continued weak U.S. shipping services throughout the US, Canada and economy and the increasingly competitive LTL pricing Mexico. The services of the company include surface environment. expedite, for exclusive use and FedEx Freight network based transport of critical shipments and expedited LTL We believe that FedEx is well positioned to gain further market share within the LTL freight market due to its shipments; air expedite. strong operating platform, cross-selling opportunity, and FedEx Freight segment revenues increased 8% during competitor attrition in a consolidating marketplace. We 2008 primarily due to the full-year inclusion of the believe FedEx National LTL stands to drive significant FedEx National LTL acquisition. LTL yield increased market share growth over the next few years as it 5% during 2008, reflecting higher yields from longer- should be one of the lowest-cost long-haul operators. haul FedEx National LTL shipments, higher fuel FedEx‘s biggest long-haul competitors are unionized surcharges and the impact of the January 2008 general carriers, and we believe FedEx has both a cost rate increase. Average daily LTL shipments grew 2% in advantage as well as a more flexible workforce that 2008, reflecting the full-year inclusion of FedEx National allows it to achieve better service levels, faster transit LTL. During the second half of 2008, average daily LTL times, and fewer freight handlings. shipments improved sequentially despite the weak U.S. economy and rising fuel costs that limited demand 4.) FedEx Services throughout the entire LTL industry. FedEx Services provides sales, marketing, information technology and customer service support, primarily for the benefit of FedEx Express and FedEx Ground. Through FedEx Services and its subsidiary, FedEx Customer Information Services, the company provides a single point of access for many customer support functions. FedEx Services offers a range of supply chain solutions, including critical inventory logistics, transportation management, and fulfillment and fleet services through its FedEx Global Supply Chain Services subsidiary. During FY2008, FedEx Office (formerly known as FedEx Kinko‘s) was reorganized as a part of the FedEx Services segment. FedEx Office is a provider of document solutions and business services.

Source: Company Annual Report

The FedEx Services segment recorded revenues of $2,138 million in FY2008, an increase of 0.1% over 2007. FedEx Services segment revenues, which reflect the operations of FedEx Office and FedEx Global Supply Chain Services, increased slightly during 2008. Revenue generated from new locations and higher package acceptance fees more than offset declines in copy revenues at FedEx Office for 2008.

It is important to note that most businesses today are trying to extend their supply chains around the world and aim for lean inventory practices, demand for guaranteed, time-definite shipping, particularly freight shipping for inventory and production purchases will grow. FedEx Freight is well-branded for the demand created by just-in-time practices. FedEx is already a market leader in heavyweight express shipments and management attributes recent growth in FedEx Freight volumes to a no-fee money-back guarantee on arrival times. To most potential customers, ―FedEx‖ means fast and the company may be able to leverage that reputation in the emerging express freight market. We expect the FedEx Freight segment to have revenue growth resulting from market share gains in 2009,

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RECENT DEVELOPMENTS 





CATALYSTS FOR GROWTH

2

International growth: We believe that FedEx is well positioned to benefit from strong growth in both domestic and international air cargo growth taking place in some of the growing economies. Revenue from FedEx‘s international priority service - its primary international parcel express service has grown at a compound annual growth rate of more than 14% for the last 8 years. It now represents 26% of the company‘s revenue, up from 17% eight years ago. FedEx has developed its network extensively in the emerging market countries and is expected to benefit from it in coming years. Last year, FedEx announced the opening of a new branch in Huzhou, China. This market is growing very quickly will help FedEx control its asia pacific business. FedEx also has been developing its logistics business in India and other emerging countries. We feel that as the economic growth continues in these emerging markets, there is a greater 3 Global delivery company DHL announced Monday need for transportation of cargo and logistics that it was cutting 9,500 jobs as it discontinues air management. Thus, FedEx will be able to add to its top and ground operations within the United States. line through increased volumes and yields. DHL said its DHL Express unit will continue to operate between the United States and other Bundling: We believe that FedEx is strongly positioned nations but it was dropping domestic-only air and to cross-sell its increasing portfolio of services, which ground services within the United States by January will help boost its volumes. If customers believe they 30, 2009 to minimize future uncertainties. We feel can reduce costs and logistical complexities by using that this bodes well for the FedEx as it gives it an FedEx for express, ground, and freight services, all opportunity to acquire DHL‘s share of business and three FedEx businesses will benefit. The bundling of grow its top line through increased revenues. services ensures that only large carriers, with different 4 FedEx recently announced a partnership with the core business, can provide this service as they have Commerce Department‘s U.S. Commercial Service the economies of scale to execute this strategy. We feel to embark on a trade mission to India. During the that FedEx‘s strategy of bundling is a good strategy for trip, FedEx and Commercial Service officials will capturing market share. If successful, bundling is also meet with potential Indian business partners, likely to help FedEx retain market share in the longagents, distributors and buyers to discuss future term because it increases the inconvenience for opportunities for American businesses. From 2003- customers of switching carriers for any one service. 2007, U.S.-India trade increased by 130 percent, reaching more than $41 billion last year while exports to India have more than doubled since 2005. Trade between the two countries is up 21 percent through the first half of 2008 compared to the same 1.) Air Freight time period last year. We feel that the above announcement is a positive for FedEx as India is Air Cargo Industry delivers mails and freights to various one of the two economies growing at a high, positive destinations across world. The freight segment consists rate and a growth in its business in Indian market of scheduled freight, chartered freight and express will help FedEx offset the U.S. economic slowdown. freight. With the fast growth in export of high-value and high-tech time sensitive goods, the air cargo industry has grown rapidly. As the value of the goods being exported increases, so their time sensitivity and hence the likelihood that the goods will be transferred by air increases. FedEx recently announced that it will raise rates for its ground and home delivery services by an average of 5.9 percent beginning on January 5, 2009. The package delivery company said it will also increase surcharges for some ground, home delivery and express shipments, effective on varying dates in January. These include increases to fees for handling, address corrections, delivery area surcharges and reattempt fees on some deliveries. FedEx earlier announced an average 6.9 percent hike in its express shipping rates for U.S. and U.S. export services effective Jan. 5. The company said the rate hike will be partially offset by a fuel surcharge reduction. We feel that the above rate hikes will help FedEx offset the decline in its business due to economic slowdown.

INDUSTRY DESCRIPTION

2

http://biz.yahoo.com http://www.reuters.com 4 http://memphis.bizjournals.com

The US air freight sector generated total revenues of $43.5 billion in 2007, representing a compound annual growth rate (CAGR) of 9.3% for the period spanning

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2003-2007. In comparison, the European and AsiaPacific regions grew with CAGRs of 6.2% and 6.4%, respectively, over the same period, to reach respective values of $17.8 billion and $27.5 billion in 2007. Sector production volumes increased with a CAGR of 6.5% between 2003-2007 with freight tonnes kilometers reaching 42.4 billion in 2007. The sector's volume is expected to rise to 53.9 billion freight tonnes kilometers by the end of 2012, representing a CAGR of 4.9% for the 2007-2012 period. The performance of the sector is forecast to accelerate, with an anticipated CAGR of 7.4% for the five-year period 2007-2012, which is expected to drive the sector to a value of $62 billion by the end of 2012. Source: Datamonitor The United States air freight market grew by 9.3% in 2007 to reach a value of $43 billion. The compound The United States accounts for 46.4% of the global annual growth rate of the market in the period 2003- market. In comparison, the Asia-Pacific market accounts for 29.4% of the global air freight market. 2007 was 9.3%.

Source: Datamonitor

Source: Datamonitor

2.) Trucking

The United States air freight market grew by 6.1% in 2007 to reach a volume of 42 billion FTK. The compound annual growth rate of the market volume in the period 2003-2007 was 6.5%.

Trucking works basically in two segments Truckload (TL) and Less than Truckload (LTL). TL freight appears sensitive to large retailers‘ sales whereas LTL traffic follows trends in factory shipments of both durable and non-durable goods. LTL handles broad range of finished products and typically excludes raw materials or low-value items. Globalization is affecting the trucking industry as well. An increasing number of goods are being manufactured in Asia and transported via containers. These goods are transferred to all parts of US through rail or truck. Thus, international container shipments have been among the fastest growing freight categories. Standard and Poor‘s trucking operating ratio, which calculates the ratio of operating expenses to operating revenues of the largest public LTL freight carriers is a

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Henry B. Tippie School of Management UPS, DHL or FedEx who benefit from their economies of scale as it would be challenging to compete with them on price. Additionally, the aircraft sector in the US is rather strictly regulated since cargo represents a concern to US national security. Also, US air freight operators often benefit from the protectionist air transport policies which preclude foreign owned operators from setting up in competition or even by chartering aircraft to American operators. Overall, the threat of new entrants is assessed as moderate.

good indication of financial performance in this industry. Prior to 1980, the operating ratios of leading LTL were in the range of 94% to 96%. After 1980, due to fierce competition operating ratio increased to 99.1% in 1995. The weak players were driven out and then gradually the operating ratio decreased to about 95% in 2003, 93.7% in 2004 and is expected to remain stable in this range. The following chart provides the metrics of FedEx relative to other LTL carrier.

The main substitute for most air freight is ground transportation. Long-term contracts between the consigner of goods and the air freight companies can add to switching costs. Ground transportation is almost always lower in price on a per-tonne-miles basis, strengthening the impact of substitutes. However, air transport is usually selected because of its speed when delivery times for medium or long distance transportation are critical. Overall, substitutes pose a moderate threat to the air freight sector.

MARKETS AND COMPETITION

Market players usually operate similar geographical markets and business models. Some companies try to differentiate their scope of activities by carrying different types of freight. Air freight is generally very important to companies offering freight transport and express services and is critically important to dedicated air cargo companies. For passenger airlines, freight carriage is less central. When market players present similar business models, rivalry is boosted furthermore as variations in market conditions affect them all in similar ways and make them compete fiercer to gain a share of revenues. Additionally, due to the nature of cargo business, fixed costs and exit barriers are high and leaving the business would require significant divestments of assets highly specific for this sector. Constantly rising fuel costs and airport expenses continue to raise the costs of operations furthermore. The rivalry within the sector is eased somewhat is assessed as moderate.

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In the air freight industry, freight operators are the market players and consumers using their services are buyers. Buyer power is increased by the lack of product differentiation and low switching costs while the Suppliers of equipment, airport infrastructure or fuel may have stronger bargaining power size due to the necessity of the freight operators. Market players in this sector mainly differentiate themselves in terms of the geographical areas they serve or type of cargo they transport, which weakens buyer power. Additionally, the backward integration is not likely to happen since freight services require costly fleet and abilities. As air transportation is relatively costly on a pertonne-miles basis, it is only likely to be chosen if it offers significant advantages compared to other modes.

New entrants are attracted to this industry by the increasing demand in the market as well as low switching costs. However, economies of scale play an important role The table given below provides a comparison between within this industry. Starting operations as an airfreight FedEx and its competitors: provider requires significant capital investment to buy aircraft, equipments and fuel costs and other operating DIRECT COMPETITOR COMPARISON expenses continue to pose a major challenge to the FDX UPS Industry airfreight sector. Faced with significantly higher fuel costs, 20.02B 53.14B 358.72M Market Cap: air freight operators have looked to pass on a share of the 223,400 425,300 1.11K Employees: burden to customers through the imposition of fuel surcharges. These fuel surcharges have led to regular 8.40% 7.40% 4.50% Qtrly Rev and, in contrast to the passenger side, highly visible Growth (yoy): increases in freight charges. Also, where major air freight 38.72B 52.18B 1.88B Revenue (ttm): hubs suffer from airport congestion, obtaining adequate 25.91% 24.80% 15.78% Gross Margin operational slots may be a barrier to entry. (ttm):

EBITDA (ttm): Oper Margins (ttm): Net Income

Another factor that may discourage newcomers is the presence of strong, international market players such as 5

Datamonitor industry report

7

4.74B 7.16%

8.25B 12.35%

104.95M 2.69%

1.01B

108.00M

N/A

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Henry B. Tippie School of Management

0.104 510.96 1.24

0.10 15.87 1.24

1.06

0.22

players to offset some of their declining volumes and yields. We feel that freight industry is closely tied to the growth of an economy and will witness an increase and package volume and yields only when the economy rebounds later next year. ISM manufacturing index 6

ISM manufacturing index data is released by the Institute for Supply Management. It tells us the state of our factories, which make everything from drugs to semiconductors to cars and airplanes. In times when the economy is teetering on the brink of recession -- as it is now -- this can be one of the biggest marketmovers. That is because it is extremely timely and tends to foreshadow where the rest of the economy will go in coming months. The ISM index is a composite based on surveys with 300 executives who are asked about where they see production, new orders, inventories, employment, and deliveries heading. The critical number is 50: A reading above 50 indicates the economy is expanding, while a lower number means it is shrinking. Thus a slowdown in manufacturing will impact the freight industry as it witnesses a slowdown in production and transportation of goods.

ECONOMIC OUTLOOK GDP growth: US economic growth is one of the key drivers of the air freight and ground freight industry. A booming economy ensures an increase in manufacturing of goods and their transportation. Also, as household income increases in a growing economy, home based cargo business grows to spur the air and ground freight business.

A lower GDP, on the other hand, implies stagnant economic activities and lower business and household We believe that the manufacturing index will post less income growth. than 50 values in coming months as even holiday season will receive a cold response from the consumers.

Source: Standard and Poor‘s trends and projections

Source: U.S. Bureau of Economic Analysis

Crude Oil and Jet fuel

The US economy has shown strong signs of sliding into recession, with consumer confidence hitting an all time low. We hold a negative outlook on the economy for at least the next two quarters and feel that consumer discretionary spending would be heavily impacted. Moreover, we feel that the economic slowdown has had a big impact on the manufacturing sector, which has slowed down the transportation of goods, which in turn will continue to negatively impact the freight industry. However, the India and China are two economies that are expected to grow at a healthy rate. These growing economies present an opportunity for the market

Fuel expenses constitute approximately 10% of the revenues for FedEx. Two types of fuel prices are important for FedEx. The crude oil prices for the truck transportation and jet fuel for air cargo transportation. Jet fuel needs to be refined and hence a crack spread is added in crude oil prices, which is the refining profit margin. Crude oil prices behave much as any other commodity with wide price swings in times of shortage or 6

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New Jersey business news – ISM manufacturing index

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Henry B. Tippie School of Management to acquire DHL‘s share of business and grow its top line through increased revenues.

oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.

Revenue from FedEx‘s international priority service its primary international parcel express service has grown at a compound annual growth rate of more than 14% for the last 8 years. We believe that FedEx is well positioned to benefit from strong growth in both domestic and international air cargo growth taking place in some of the growing economies.



Reduced oil and jet fuel prices continue to help FedEx as it is able to share these fuel savings with its customers and thus price its services at a competitive rate.



Source: NYMEX

INVESTMENT NEGATIVES

The price paid for jet fuel is a function of long-term contracts, spot market prices and point of sale, among other factors. Fluctuations in the market price of jet fuel are highly correlated with movements in the price of home heating oil.

Slow economic growth in the US has negatively impacted FedEx business and may further slow down growth in the domestic Express, Ground and Freight segments, as the transportation industry is closely correlated to GDP.



DHL is very aggressive in China with its strong strategic relationships. Hence, FedEx might have to face stiff competition as it tries to expand in this new market.



FedEx is currently involved in legal review of the classification of its independent contractors at FedEx Ground. A change in FedEx Ground‘s owner operator model could both constrain the segment‘s growth potential and impact its operating ratio.



Source: NYMEX Oil prices have plunged in recent weeks and with them the cost of fuel for the airlines. Jet fuel fell to an average $2.16 a gallon last month, down 45% from its peak this July. But major airlines have been slow to share this good fortune with fliers. We feel that as air freight operators will begin to share these cost savings with the customers soon by reducing their fuel surcharge. We expect the oil and jet fuel prices to stay low for next few months as the demand for oil is expected to be constrained by the global economic recession. However, in the long term, we feel that growing economies will once again and drive up the demand and oil prices.

VALUATION DCF and Economic Profit Valuation: We recommend a ‗HOLD‘ on the FedEx stock based on its intrinsic price of $87.40. We have derived our intrinsic stock price based on the Discounted Cash Flow analysis and Economic Profit analysis of FedEx‘s business. Overall, we have forecasted FedEx‘s revenue growth at 7.84% for our forecast period and a terminal growth rate of 3%. We have incorporated a discount rate of 6.47%, beta of 0.85 and a risk free rate of ten-year treasury at 4.29%.

INVESTMENT POSITIVES FedEx margins are expected to expand driven by higher contribution from high margin international shipments and improved productivity.



Global delivery company DHL‘s discontinuation of air and ground operations in US. We feel that this bodes well for the FedEx as it gives it an opportunity



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REFERENCES 1. www.mergentonline.com 2. www.fedex.com 3. www.airlines.org 5. Company Annual reports - 2006, 2007 6. www.bea.gov – Bureau of Economic Analysis 7. www.moneycentral.msn.com 8. www.finance.yahoo.com 9. www.cnn.com 11. www.standardpoors.com 12. www.wikinvest.com 13. www.datamonitor.com

IMPORTANT DISCLAIMER This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa‘s Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

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Revenue Driver – 2009 – 2010, Quarterly Forecast FedEx Corp Average daily package volume (ADV) FedEx Express Domestic YoY Growth International YoY Growth International Domestic YoY Growth Average Revenues FedEx Express Domestic YoY Growth International YoY Growth International Domestic YoY Growth Average daily package volume (ADV) FedEx Ground YoY Growth FedEx Smartpost YoY Growth Average Revenues FedEx Ground YoY Growth FedEx Smartpost YoY Growth Average daily LTL shipments FedEx Freight YoY Growth Revenue per hundredweight FedEx Freight YoY Growth

Revenues FedEx Express YoY Growth FedEx Ground YoY Growth FedEx Freight $ YoY Growth FedEx Services Segment $ YoY Growth Other $ YoY Growth Total Revenue YoY Growth

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

2,560

2,602 1.650% 503 1.650% 318 3.500%

2,570 -1.250% 497 -1.250% 327 3.000%

2,527 -1.650% 505 1.650% 336 2.775%

2,496 -1.250% 499 -1.250% 341 1.500%

2,468 -1.100% 493 -1.100% 345 1.000%

2,493 1.000% 498 1.000% 350 1.500%

2,462 -1.250% 492 -1.250% 357 1.875%

18.30 9.712% 64.54 11.065% 8.6 -1.932%

18.8 3.000% 66.5 3.000% 8.6 -0.500%

19.2 2.000% 67.8 2.000% 8.5 -0.500%

19.8 3.000% 69.8 3.000% 8.5 -0.500%

20.2 2.000% 71.2 2.000% 8.5 -0.500%

20.6 2.000% 72.7 2.000% 8.4 -0.500%

21.0 2.000% 74.5 2.500% 8.4 -0.500%

21.4 2.000% 76.3 2.500% 8.4 0.500%

3,339 -0.773% 584 -5.502%

3,389.1 1.500% 581.1 -0.500%

3,439.9 1.500% 578.2 -0.500%

3,491.5 1.500% 581.6 0.600%

3,526.4 1.000% 585.1 0.600%

3,561.7 1.000% 588.6 0.600%

3,597.3 1.000% 592.2 0.600%

3,633.3 1.000% 595.7 0.600%

7.86 5.080% 2.14 2.392%

8.0 1.200% 2.14 0.120%

8.0 1.200% 2.15 0.120%

8.1 1.200% 2.1 0.120%

8.2 1.200% 2.15 0.120%

8.3 1.200% 2.15 0.120%

8.4 1.200% 2.16 0.120%

8.5 1.200% 2.16 0.120%

83 3.808%

83.7 1.200%

84.7 1.200%

85.7 1.200%

86.8 1.200%

87.6 1.000%

88.7 1.200%

89.8 1.200%

20.44 4.020%

20.7 1.100%

20.9 1.100%

21.1 1.100%

21.4 1.100%

21.6 1.000%

21.8 1.100%

22.0 1.100%

495 307

6,419,000

6,392,004 -0.421% 1,761,000 1,896,643 7.703% 1,353,000 $ 1,397,154 $ 3.263% 513,000 514,282.5 0.250% (76,000) $ (25,000) $ 9,970,000

10,175,083 2.057%

6,441,947 6,613,626 6,662,149 6,719,813 0.781% 2.665% 0.734% 0.866% 1,945,599 1,996,815 2,039,732 2,083,589 2.581% 2.632% 2.149% 2.150% 1,429,473 $ 1,462,540 $ 1,496,371 $ 1,526,448 $ 2.313% 2.313% 2.313% 2.010% 515,568.2 516,857.1 518,149.3 519,444.6 0.250% 0.250% 0.250% 0.250% (25,000) $ (25,000) $ (35,000) $ (35,000) $ 10,307,588 1.302%

11

10,564,838 2.496%

10,681,401 1.103%

10,814,295 1.244%

6,931,914 6,999,558 3.156% 0.976% 2,128,407 2,174,207 2.151% 2.152% 1,561,758 $ 1,597,885 2.313% 2.313% 520,743.3 522,045.1 0.250% 0.250% (35,000) $ (35,000) 11,107,822 2.714%

11,258,695 1.358%

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

Revenue Drivers

FedEx Corp 2006 Average daily package volume (ADV) FedEx Express Domestic YoY Growth International YoY Growth International Domestic YoY Growth Average Revenues FedEx Express Domestic YoY Growth International YoY Growth International Domestic YoY Growth Average daily package volume (ADV) FedEx Ground YoY Growth FedEx Smartpost YoY Growth Average Revenues FedEx Ground YoY Growth FedEx Smartpost YoY Growth Average daily LTL shipments FedEx Freight YoY Growth Revenue per hundredweight FedEx Freight YoY Growth

Revenues FedEx Express YoY Growth FedEx Ground YoY Growth FedEx Freight YoY Growth FedEx Services Segment YoY Growth Other YoY Growth Total Revenue YoY Growth

2007

2008

2011E

2012E

2013E

CV

2,778 -1.384% 487 4.506% 134 191.304%

2,723 -1.980% 517 6.160% 296 120.896%

2,499 1.500% 499 1.500% 364 2.000%

2,511 0.500% 529 6.000% 382 5.000%

2,524 0.500% 561 6.000% 401 5.000%

2,536 0.500% 567 1.000% 405 1.000%

16.04 2.427% 54.13 4.822% 10.8 -35.470%

16.68 3.990% 58.11 7.353% 8.8 -18.292%

21.8 1.500% 77.5 1.500% 8.5 0.500%

22.6 4.000% 81.4 5.000% 8.5 0.500%

23.5 4.000% 85.4 5.000% 8.5 0.500%

23.8 1.000% 86.3 1.000% 8.6 0.500%

3,126 11.048% 599 58.886%

3,365 7.646% 618 3.172%

3,687.8 1.500% 601.7 1.000%

3,872 5.000% 607.7 1.000%

4,066 5.000% 613.8 1.000%

4,106 1.000% 619.9 1.000%

7.21 2.707% 1.88 21.290%

7.48 3.745% 2.09 11.170%

8.7 2.000% 2.17 0.500%

8.98 3.000% 2.18 0.500%

9.25 3.000% 2.19 0.500%

9.34 1.000% 2.20 0.500%

67.0

78.0 16.418%

79.7 2.179%

91.6 2.000%

95 4.000%

99 4.000%

100 1.000%

16.84

18.65 10.748%

19.65 5.362%

22.7 3.000%

24.07 6.000%

25.51 6.000%

25.77 1.000%

3,287 2,817 466 46

21.75 15.66 51.64 16.7

2,815 377

7.02 1.55

21,446,000

22,681,000 23,420,193 28,839,866 29,965,889 32,196,296 5.759% 3.259% 5.589% 3.904% 7.443% 5,306,000 6,043,000 6,770,784 8,996,823 9,706,738 10,474,160 13.890% 12.043% 6.775% 7.891% 7.906% $3,645,000 $ 4,586,000 $ 5,058,519 $ 6,714,951 $ 7,402,562 $ 8,160,584 $ 25.816% 10.304% 8.613% 10.240% 10.240% $2,088,000 $ 2,137,000 $ 2,138,000 $ 2,105,347 $ 2,130,611 $ 2,156,178 $ 2.347% 0.047% 1.200% 1.200% 1.200% $ (191,000) $ (233,000) $ (150,000) $ (150,000) $ (150,000) $ (150,000) $

32,753,467 1.731% 10,682,864 1.993% 8,324,612 2.010% 2,182,053 1.200% (150,000)

32,294,000

53,792,996 1.809%

35,214,000 9.042%

37,953,000 7.778%

12

46,506,986 6.030%

49,055,800 5.480%

52,837,219 7.708%

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

Assumptions

FedEx Corp Revenue, Income Statement and Balance Sheet projections

Fiscal Years Ending 12/31

2006

2007

2008

2009E

2010E

2011E

2012E

2013E

CV

9.0%

7.8%

8.1%

6.9%

6.0%

5.5%

7.7%

1.81%

Increase in Revenues by Business Segments

Y-Y Revenue Growth (resulting) Salaries & employee benefits Purchased transportation Rentals & landing fees Depreciation & amortization Fuel Maintenance & repairs

38.9% 10.1% 7.4% 4.8% 10.1% 5.5%

39.0% 11.0% 6.7% 4.9% 10.0% 5.5%

37.4% 11.7% 6.4% 5.1% 12.1% 5.4%

37.4% 11.7% 6.4% 5.1% 12.1% 5.4%

37.4% 11.7% 6.4% 5.1% 12.1% 5.4%

37.4% 11.7% 6.4% 5.1% 12.1% 5.4%

37.4% 11.7% 6.4% 5.1% 12.1% 5.4%

37.4% 11.7% 6.4% 5.1% 12.1% 5.4%

37.4% 11.7% 6.4% 5.1% 12.1% 5.4%

Other operating expenses

13.9%

13.5%

14.0%

Interest Expense as a % of ST Debt Interest Expense as a % of LT Debt Income Tax Expense as a % of EBT

37.7%

37.3%

44.2%

14.0% 4.65% 5.5% 35.0%

14.0% 4.65% 5.5% 35.0%

14.0% 4.65% 5.5% 35.0%

14.0% 4.65% 5.5% 35.0%

14.0% 4.65% 5.5% 35.0%

14.0% 4.65% 5.5% 35.0%

6.0%

4.5%

4.1%

4.8%

26.5%

35.6%

47.0%

59.3%

20.4%

Receivables, less allowances 10.9% Spare parts, supplies and fuel, less allowances 1.0% Deferred income taxes Prepaid expenses and other 0.5%

11.2% 1.0% -3

11.5% 1.1% 8

11.8% 1.20% 10

12.3% 1.30% 10

12.1% 1.40% 10

12.0% 1.50% 10

12.0% 1.50% 10

11.5% 1.50% 10

0.7%

1.0%

1.1%

1.1%

1.1%

1.1%

1.1%

1.1%

Aircraft and related equipment Package handling and GSE Computer and electronic equipment Vehicles Facilities and other

26.7% 17.8% 13.4%

27.2% 11.0% 13.3%

26.8% 12.7% 13.3%

26.8% 12.7% 13.3%

26.8% 12.7% 13.3%

26.8% 12.7% 13.3%

26.8% 12.7% 13.3%

26.8% 12.7% 13.3%

26.8% 12.7% 13.3%

7.0% 9.7% 55.3%

7.3% 18.1% 53.4%

7.3% 17.2% 54.0%

-44

-319

7.3% 17.2% 54.01% 75 -50 1,699

7.3% 17.2% 54.01% 75 -50 1,463

7.3% 17.2% 54.01% 75 -50 1,241

7.3% 17.2% 54.01% 75 -50 1,051

7.3% 17.2% 54.01% 75 -50 898

7.3% 17.2% 54.01% 75 -50 6,201

0.0% 4.1% 4.3%

0.0% 3.8% 4.0%

0.0% 2.9% 4.1%

5.9%

5.7%

5.8%

20.00% 2.8% 4.0% 500 5.7%

20.00% 2.8% 4.0% 499 5.8%

20.00% 2.8% 4.0% 250 5.9%

20.00% 3.0% 4.0% 6.0%

18.00% 3.0% 4.0% 300 6.0%

18.00% 3.0% 4.0% 6.0%

2.1% 2.2% Self-insurance accruals as % of Sales Deferred income taxes Deferred lease obligations as % of PPE,net Deferred gains, principally related to aircraft transactions

2.1%

Other liabilities as a % of Sales

Cash and cash equivalents as a % of Sales Short-term investments

Accu. Depreciation as a % of Depreciable assets Amoritization of Other intangible assets

Y-Y change in Pension Assets ($) Operating Leases as % of assets Short-term Debt as % of Current Assets Accrued Salaries and Employee Benefits as % of Sales Accrued Expenses as % of Sales Current portion of L-T debt Accounts payable as a % of Sales Y-Y change in Pension Liabilities

Long-term debt as a % of shareholders equity Share Repurchase ($) Y-Y Dividend per Share increase (@10%) 10%

10

10

10

10

10

10

2.1% -50

2.1% -50

2.1% -50

2.1% -50

2.1% -50

2.1% -50

20 (20.00) 0.45%

20 (20.00) 0.40%

20 (20.00) 0.40%

20 (20.00) 0.40%

20 (20.00) 0.40%

0.2%

0.3%

0.5%

20 (20.00) 0.50%

108.4%

116.7% (2) $0.36

77.1% 0 $0.40

75.0% (150) $0.44

75.0% (165) $0.48

70.0% (175) $0.53

70.0% (180) $0.59

65.0% (180) $0.64

65.0% (180) $0.71

$138

$151

$167

$184

$203

$224

Amount Paid as dividend

13

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

Income Statement 2009 – 2010, Quarterly

FedEx Corp Income Statement (Millions) Fiscal Years Ending 05/31

Estimated Estimated Estimated Estimated Estimated Estimated Estimated Estimated Estimated Estimated 2009Q1 2009Q2 2009Q3 2009Q4 2009E 2010Q1 2010Q2 2010Q3 2010Q4 2010E

Total revenues

9970

10175

10308

10565

41018

10681

10814

11108

11259

43862

Salaries & employee benefits Purchased transportation Rentals & landing fees Depreciation & amortization Fuel Maintenance & repairs Impairment charges Other operating expenses

3,585 1,207 617 492 1,599 537 0 1,303

3808 1192 654 522 1232 554 0 1420

3857 1208 663 529 1248 562 0 1438

3953 1238 679 542 1279 576 0 1474

15203 4845 2614 2084 5359 2229 0 5635

3997 1252 687 548 1293 582 0 1490

4047 1267 696 554 1310 589 0 1509

4157 1302 714 570 1345 605 0 1550

4213 1319 724 577 1363 613 0 1571

16413 5139 2821 2249 5312 2390 0 6121

Total costs, expenses & other

9340

9382

9505

9742

37969

9849

9972

10242

10382

40445

Interest expense Interest income Other income (expense), net

0 -9 -3

0 -9 (1)

0 -9 (1)

0 -9 (1)

0 -36 -6

0 -11 (1)

0 -11 (1)

0 -11 (1)

0 -11 (1)

0 -44 -4

Income (loss) before taxes

618

783

793

813

3007

820

831

853

865

3369

Tax expense (benefit)

234

274

278

285

1070

287

291

299

303

1179

Income (loss) from continuing operations 384 Income (loss) from discontinued operations, net of taxes 0

509 0

516 0

529 0

1937 0

533 0

540 0

555 0

562 0

2190 0

Net income (loss)

384

509

516

529

1937

533

540

555

562

2190

312.51 1.23

312.51 1.63

312.51 1.65

312.51 1.69

313 6.20 $0.44

313 1.70

313 1.72

313 1.77

313 1.80

313 7.00 $0.48

Weighted average shares outstanding Net earnings (loss) per share Dividends per common share

14

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

Income Statement

FedEx Corp Income Statement (Millions) Fiscal Years Ending 05/31

Estimated Estimated Estimated Estimated Estimated Estimated 2009E 2010E 2011E 2012E 2013E CV

2006

2007

2008

Total revenues

32294

35214

37953

41018

43862

46507

49056

52837

53793

Salaries & employee benefits Purchased transportation Rentals & landing fees Depreciation & amortization Fuel Maintenance & repairs Impairment charges Other operating expenses

12,571 3,251 2,390 1,550 3,256 1,777 4,485

13,740 3,873 2,343 1,742 3,533 1,952 4,755

14,202 4,447 2,441 1,946 4,596 2,068 882 5,296

15203 4845 2614 2084 5359 2229 0 5635

16413 5139 2821 2249 5312 2390 0 6121

17403 5449 2991 2385 5632 2534 0 6490

18357 5748 3155 2515 5941 2673 1 6845

19772 6191 3398 2709 6398 2879 2 7373

20129 6303 3460 2758 6514 2931 3 7506

Total costs, expenses & other

29280

31938

35878

37969

40445

42884

45235

48723

49605

Interest expense Interest income Other income (expense), net

142 38 -11

136 83 -8

98 44 -5

0 -36 -6

0 -44 -4

(55) (5)

(59) (5)

(64) (5)

(70) (3)

Income (loss) before taxes

2899

3215

2016

3007

3369

3623

3821

4115

4188

Tax expense (benefit)

1093

1199

891

1070

1179

1268

1337

1440

1466

Income (loss) from continuing operations 1806 Income (loss) from discontinued operations, net of taxes 0

2016 0

1125 0

1937 0

2190 0

2355 0

2484 0

2675 0

2722 0

Net income (loss)

1806

2016

1125

1937

2190

2355

2484

2675

2722

Weighted average shares outstanding Net earnings (loss) per share Dividends per common share

310 5.83

311 6.48 $0.36

312 3.61 $0.40

313 6.20 $0.44

313 7.00 $0.48

314 7.51 $0.53

314 7.91 $0.59

315 8.49 $0.64

316 8.62 $0.71

15

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

Balance Sheet

FedEx Corp Balance Sheet USD Millions Fiscal Years Ending 05/31

2007

2008

2009E

2010E

2011E

2012E

2013E

CV

Cash Receivables, less allowances Spare parts, supplies and fuel, less allowances Deferred income taxes Prepaid expenses and other Total current assets

$ 1,569 3,942 338 536 244 6,629

$ 1,539 4,359 435 544 367 7,244

1,974 4,840 492 554 451 8,312

2,829 5,395 570 564 482 9,841

3,850 5,627 651 574 512 11,214

5,224 5,887 736 584 540 12,971

6,674 6,340 793 594 581 14,983

8,954 6,186 807 604 592 17,143

Aircraft and related equipment Package handling and GSE Computer and electronic equipment Vehicles Facilities and other Gross property, plant & equipment Accumulated depreciation Property, plant & equipment, net Goodwill Intangible and other assets Pension assets Total assets

9,593 3,889 4,685 2,561 6,362 27,090 14,454 12,636 3,497 – 1,238 24,000

10,165 4,817 5,040 2,754 6,529 29,305 15,827 13,478 3,165 827 919 25,633

10986 5206 5447 2976 7056 31,671 17105 14,566 3,165 752 869 27,664

11748 5567 5825 3183 7546 33,868 18291 15,576 3,165 677 819 30,079

12456 5903 6176 3375 8001 35,910 19394 16,516 3,165 602 769 32,266

13139 6226 6514 3560 8439 37,878 20457 17,421 3,165 527 719 34,802

14151 6706 7017 3834 9090 40,798 22034 18,764 3,165 452 669 38,032

14407 6827 7143 3903 9254 41,536 22433 19,103 3,165 377 619 40,407

Accounts payable Short-term debt Accrued salaries and employee benefits Current portion of long-term debt Accrued Expenses Total current liabilities

2,016 0 1,354 $ 639 1,419 5,428

2,195 0 1,118 $ 502 1,553 5,368

2338 0 1148 500 1641 5,627

2544 0 1228 499 1754 6,026

2744 0 1302 250 1860 6,156

2943 0 1472 1962 6,377

3170 0 1585 300 2113 7,169

3228 0 1614 2152 6,993

Long-term debt 2,007 Pension, postretirement health and other benefit obligations 1,164 Self-insurance accruals 759 Deferred income taxes 897 Deferred lease obligations 655 Deferred gains, principally related to aircraft transactions 343 Other long-term liabilities 91 Total Liabilities 11,344

1,506 989 804 1,264 671 315 190 11,107

1518 999 869 1,214 691 295 205 11,418

1573 1,009 929 1,164 711 275 197 11,885

1528 1,019 985 1,114 731 255 186 11,974

1598 1,029 1039 1,064 751 235 196 12,290

1565 1,039 1119 1,014 771 215 211 13,104

1663 1,049 1140 964 791 195 215 13,010

Common shares

1,720

1,953

2,024

2,098

2,182

2,283

2,408

2,558

Accumulated other comprehensive income (loss) Retained earnings Treasury stock, at cost Total shareowners' equity

(1,030) 11,970 (4) 12,656

(425) 13,002 (4) 14,526

(425) 14,801 (154) 16,246

(425) 16,840 (319) 18,194

(425) 19,028 (494) 20,292

(425) 21,328 (674) 22,512

(425) 23,800 (854) 24,929

(425) 26,298 (1034) 27,397

Total Liabilities and Shareholders Equity

24,000

25,633

27,664

30,079

32,266

34,802

38,032

40,407

16

THE UNIVERSITY OF IOWA

Henry Fund Research

Henry B. Tippie School of Management

Value Driver FedEx Corp Value Driver Calculations 2007 $ Mil

2008 $ Mil

2009E $ Mil

2010E $ Mil

2011E $ Mil

2012E $ Mil

2013E $ Mil

CV $ Mil

NOPLAT Pre-Tax Earnings Add: Interest Expense EBITA Less: Tax on EBITA Marginal Tax Rate Total Income Tax Provision Add: Tax Shield on Interest Expense Add: Tax Shield on Amoritization Less: Tax Shield on non-operating income Taxes on EBITA Add: Changes in Deferred Tax NOPLAT INVESTED CAPITAL Operating Working Capital Plus: Normal Cash * Plus: Receivables Plus: Spares Plus: Prepaid Expenses and Other Less: Accounts Payable Less: Other current liabilities Less: Accrued salaries and employee benefits Net Operating Working Capital Net Property Plant Equipment Add:Other Long Term Op. Assets Add: Operating Leases Net Invested Capital ROIC (Return on Invested Capital) NOPLAT Invested Capital (Beginning) ROIC (NOPLAT/Invested Capital) FREE CASH FLOWS NOPLAT

3,215 53 3,268

2,016 54 2,070

3,007 36 3,043

3,369 44 3,413

3,623 55 3,678

3,821 59 3,880

4,115 64 4,179

4,188 70 4,258

37.29% 1,199 20 429 3 1,651 1,617

44.20% 891 24 607 2 1,524 359 905

35.00% 1,070 13 447 1 1,531 (60) 1,452

35.00% 1,179 15 415 0 1,610 (60) 1,743

35.00% 1,268 19 386 0 1,674 (60) 1,945

35.00% 1,337 21 372 0 1,730 (60) 2,090

35.00% 1,440 22 552 2 2,017 (60) 2,102

35.00% 1,466 25 140 0 1,630 (60) 2,568

1,569 3,942 338 244 (2,016) (1,419) (1,354) 1,304 12,636 -

949 4,359 435 367 (2,195) (1,553) (1,118) 1,244 13,478 -

13,940

14,722

1,025 4,840 492 451 (2,338) (1,641) (1,148) 1,682 14,566 1,803 18,051

1,097 5,395 570 482 (2,544) (1,754) (1,228) 2,018 15,576 1,647 19,241

1,163 5,627 651 512 (2,744) (1,860) (1,302) 2,046 16,516 1,482 20,044

1,226 5,887 736 540 (2,943) (1,962) (1,472) 2,011 17,421 1,332 20,764

1,321 6,340 793 581 (3,170) (2,113) (1,585) 2,166 18,764 1,208 22,138

1,345 6,186 807 592 (3,228) (2,152) (1,614) 1,937 19,103 8,338 29,378

1,617

905 13,940 6.49%

1,452 14,722 9.86%

1,743 18,051 9.66%

1,945 19,241 10.11%

2,090 20,044 10.43%

2,102 20,764 10.12%

2,568 22,138 11.60%

1,452 3,329 (1,877)

1,743 1,190 553

1,945 803 1,142

2,090 720 1,370

2,102 1,374 728

2,568 7,240 (4,672)

6.47% -

13,940 6.49% 6.47% 4

14,722 9.86% 6.47% 500

18,051 9.66% 6.47% 576

19,241 10.11% 6.47% 701

20,044 10.43% 6.47% 794

20,764 10.12% 6.47% 760

22,138 11.60% 6.47% 1,137

1569 1569 0

1539 949 590

1974 1025 949

2829 1097 1733

3850 1163 2687

5224 1226 3998

6674 1321 5353

8954 1345 7609

0

590

949

1733

2687

3998

5353

7609

1,617

905 782 123

Net Investment (Change in Invested Capital)

Free Cashflows (NOPLAT - NI) ECONOMIC PROFIT Invested Capital (Beginning) ROIC WACC EP (Invested Capital*(ROIC - WACC)) NON-OPERATING ASSETS Cash on Hand "Normal" Cash Excess Cash Investments & LT Recievables Non-Operating Assets

17

THE UNIVERSITY OF IOWA

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Henry B. Tippie School of Management

Common Size Income Statement

FedEx Corp Income Statement

Fiscal Years Ending 12/31

2005

2006

2007

2008E

2009E

2010E

2011E

2012E

CV

Total revenues

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

Cost of products sold Research & development Expenses Interest Expense, Net Other (income) expense-net

38.93% 10.07% 7.40% 4.80% 10.08%

39.02% 11.00% 6.65% 4.95% 10.03%

37.42% 11.72% 6.43% 5.13% 12.11%

37.06% 11.81% 6.37% 5.08% 13.06%

37.42% 11.72% 6.43% 5.13% 12.11%

37.42% 11.72% 6.43% 5.13% 12.11%

37.42% 11.72% 6.43% 5.13% 12.11%

37.42% 11.72% 6.43% 5.13% 12.11%

37.42% 11.72% 6.43% 5.13% 12.11%

Total costs, expenses & other

90.67%

90.70%

94.53%

92.57%

92.21%

92.21%

92.21%

92.21%

92.21%

Income (loss) before taxes

8.98%

9.13%

5.31%

7.33%

7.68%

7.79%

7.79%

7.79%

7.79%

3.38% Tax expense (benefit) 5.59% Income (loss) from continuing operations Income (loss) from discontinued operations, net of taxes 0.00%

3.40% 5.72% 0.00%

2.35% 2.96% 0.00%

2.61% 4.72% 0.00%

2.69% 4.99% 0.00%

2.73% 5.06% 0.00%

2.73% 5.06% 0.00%

2.73% 5.06% 0.00%

2.72% 5.06% 0.00%

5.59%

5.72%

2.96%

4.72%

4.99%

5.06%

5.06%

5.06%

5.06%

Selling & administrative expenses

Net income (loss)

18

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Henry B. Tippie School of Management

Common Size Balance Statement

FedEx Corp Balance Sheet

Fiscal Years Ending 12/31

2007

2008E

2009E

2010E

2011E

2012E

CV

Cash & cash equivalents

4.06% 11.49% 1.15% 1.43% 0.97% 19.09%

4.81% 11.80% 1.20% 1.35% 1.10% 20.26%

6.45% 12.30% 1.30% 1.29% 1.10% 22.44%

8.28% 12.10% 1.40% 1.23% 1.10% 24.11%

10.65% 12.00% 1.50% 1.19% 1.10% 26.44%

12.63% 12.00% 1.50% 1.12% 1.10% 28.36%

16.65% 11.50% 1.50% 1.12% 1.10% 31.87%

Total assets

26.78% 17.20% 77.21% 41.70% 35.51% 8.34% 2.18% 2.42% 67.54%

26.78% 17.20% 77.21% 41.70% 35.51% 7.72% 1.83% 2.12% 67.44%

26.78% 17.20% 77.21% 41.70% 35.51% 7.22% 1.54% 1.87% 68.58%

26.78% 17.20% 77.21% 41.70% 35.51% 6.81% 1.29% 1.65% 69.38%

26.78% 17.20% 77.21% 41.70% 35.51% 6.45% 1.07% 1.47% 70.94%

26.78% 17.20% 77.21% 41.70% 35.51% 5.99% 0.86% 1.27% 71.98%

26.78% 17.20% 77.21% 41.70% 35.51% 5.88% 0.70% 1.15% 75.12%

Accounts payable Accrued compensation Current portion of long-term debt Other current liabilities Total current liabilities

5.78% 2.95% 1.32% 4.09% 14.14%

5.70% 2.80% 1.22% 4.00% 13.72%

5.80% 2.80% 1.14% 4.00% 13.74%

5.90% 2.80% 0.54% 4.00% 13.24%

6.00% 3.00% #VALUE! 4.00% 13.00%

6.00% 3.00% 0.57% 4.00% 13.57%

6.00% 3.00% #VALUE! 4.00% 13.00%

Long-term debt Pension liabilities Other postretirement liabilities Other long-term liabilities Total Liabilities

3.97% 2.61% 2.12% 0.50% 29.27%

3.70% 2.44% 2.12% 0.50% 27.84%

3.59% 2.30% 2.12% 0.45% 27.10%

3.28% 2.19% 2.12% 0.40% 25.75%

3.26% 2.10% 2.12% 0.40% 25.05%

2.96% 1.97% 2.12% 0.40% 24.80%

3.09% 1.95% 2.12% 0.40% 24.18%

Common shares Accumulated other comprehensive income (loss) Retained earnings Deferred compensation plans Total shareowners' equity

5.15% -1.12% 34.26% -0.01% 38.27%

4.93% -1.04% 36.09% -0.38% 39.61%

4.78% -0.97% 38.39% -0.73% 41.48%

4.69% -0.91% 40.91% -1.06% 43.63%

4.65% -0.87% 43.48% -1.37% 45.89%

4.56% -0.80% 45.04% -1.62% 47.18%

4.76% -0.79% 48.89% -1.92% 50.93%

Total Liabilities and Shareholders Equity

67.54%

67.44%

68.58%

69.38%

70.94%

71.98%

75.12%

Accounts receivable Inventories Deferred income taxes Other current assets

Total current assets Land & buildings Machinery & equipment Gross property, plant & equipment Less-accumulated depreciation & amortization Property, plant & equipment, net Goodwill Other intangible assets, net Deferred income taxes

19

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Henry B. Tippie School of Management

Valuation

FedEx Corp Valuation Calculations Fiscal Years Ending Dec 31st

DCF Model FCF PV(FCF) PV(FCF) + PV(Non-Oper) - PV(Debt + Op. Leases) - PV(ESOP) PV(Equity) Shares Outst. Target Price Target Price EP Model ROIC EP PV(EP) PV(EP) Invested Capital PV(Operations) + PV(Non-Oper) - PV(Debt + Op. Leases) - PV(ESOP) PV(Equity) Shares Outst. Target Price Target Price

$ $ $ $ $ $ $

WACC CV Growth Rate CV ROIC Cost of Equity

41,433 590.2 15,551 249 26,223 312 84.05 87.40

2008E

2009E

2010E

2011E

2012E

CV

-1877 -1763

553 488

1142 946

1370 1066

728 532

54939 40164

10.12% 760 555

11.60% 32801 23980

As of Last FY End As of 11/24/2008 (growth at cost of Equity)

9.86% 500 470 $ $ $ $ $ $ $ $ $

26,711 14,722 41,433 590 15,551 249 26,223 312 84.05 87.40

6.47% 3.00% 11.60% 8.39%

9.66% 576 508

10.11% 701 581

10.43% 794 618

As of Last FY End As of 11/24/2008 (growth at cost of Equity)

20

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Henry B. Tippie School of Management

DDM

FedEx Corp

Dvidend Discount Model 2009E EPS

$6.20

2010E

2011E

$7.00

$7.51

2012E $7.91

2013E $8.49

CV $8.62

Key Assumptions WACC CV ROE CV Growth Cost of Equity

6.47% 11.60% 3.00% 8.39%

Future Cash Flows P/E Mutliple EPS Next Period Stock Price Dividend FCF DCF Target Price Target Price

11.9 $8.62 $102.53 $0.64 $103.17 75.43

$0.44 $0.44 0.41

$0.48 $0.53 $0.59 $0.48 $0.53 $0.59 0.43 0.44 0.46 77.17 As of last FY End 80.24 As of 11/24/2008 (Growth at Cost of Equity)

21

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WACC

FedEx Corp Weighted Average Cost of Capital (WACC) Estimation Key Assumptions for Honeywell's Valuation Model Ticker FDX (NYSE) Current Stock Price Shares Outstanding Effective Tax Rate Normal Cash (% of Revenue) CV Growth Rate Risk-Free Rate Inflation Rate Real Risk Free Rate Market Risk Premium Beta (2 Year Weekly) WACC

64.85 312000000 35.0% 2.5% 3.00% 4.29% 4.90% -0.61% 4.82% 0.850 6.47%

(30 Yr Treasury)

COMPUTATION OF WACC Capital Structure Equity (MV) Debt (BV) Op. Lease Total WACC Cost of Equity Risk Free Rate Market Risk Premium Beta Cost of Equity

Cost of Debt Corporate Bond Rating Cost of debt before taxes Cost of Debt After taxes Cost of Debt after taxes

Proportion 20,233 2,997 12,554 35,784 6.47%

56.54% 8.38% 35.08%

Cost 8.39%

3.97%

4.29% 4.82% 0.85 8.39%

A 6.10% 3.97% Bloomberg

22

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Henry B. Tippie School of Management

Operating Leases

PV of Operaing Leases 2009

2010

2011

2012

2013

PV of Operating Leases PV of Operating Leases

1803 1699.3

1647 1463.1

1482 1240.8

1332 1051.1

1208 898.4

CV 8338 6201.3

Total Y-Y PV of Operating Lease

12554.1

9236.44

6201.33

12035.46 10976.12 10048.27

Sensitivity Analysis CV Growth Rate & Beta

$

87.40 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1 1.05 1.1 1.15 1.2

1.00% 81.09 76.73 72.60 68.70 65.00 61.49 58.15 54.98 51.95 49.07 46.31 43.68 41.16 38.75

1.50% 89.69 84.59 79.79 75.29 71.05 67.04 63.25 59.67 56.27 53.04 49.97 47.05 44.26 41.61

2.00% 100.65 94.52 88.82 83.51 78.54 73.88 69.50 65.38 61.50 57.83 54.36 51.07 47.96 44.99

2.50% 115.08 107.49 100.50 94.04 88.06 82.50 77.32 72.48 67.96 63.71 59.72 55.96 52.42 49.07

23

2.75% 124.17 115.57 107.71 100.50 93.85 87.71 82.02 76.73 71.80 67.19 62.87 58.83 55.02 51.43

3.00% 134.97 125.11 116.16 108.01 100.56 93.71 87.40 81.56 76.15 71.11 66.42 62.03 57.92 54.07

3.25% 148.02 136.52 126.19 116.87 108.40 100.68 93.61 87.11 81.12 75.58 70.44 65.65 61.19 57.01

3.75% 184.45 167.78 153.20 140.33 128.90 118.67 109.47 101.14 93.57 86.66 80.32 74.49 69.10 64.12

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Marginal Tax Rate & Risk Free Rate

$

87.40 2.6% 2.8% 3.0% 3.2% 3.4% 3.6% 3.8% 4.0% 4.2% 4.4% 4.6% 4.8% 5.0% 5.2% 5.4% 5.6%

31.00% 137.45 128.99 121.20 114.00 107.33 101.14 95.36 89.97 84.92 80.18 75.72 71.53 67.57 63.82 60.28 56.92

32.00% 139.56 130.93 122.99 115.66 108.87 102.57 96.70 91.21 86.09 81.28 76.76 72.50 68.48 64.69 61.10 57.70

33.00% 141.72 132.91 124.82 117.35 110.44 104.02 98.05 92.48 87.27 82.39 77.80 73.49 69.42 65.57 61.93 58.49

34.00% 143.93 134.94 126.68 119.07 112.03 105.50 99.43 93.77 88.48 83.52 78.87 74.49 70.36 66.46 62.78 59.29

35.00% 146.18 137.00 128.58 120.82 113.65 107.01 100.83 95.08 89.70 84.67 79.94 75.50 71.32 67.37 63.63 60.10

36.00% 148.48 139.11 130.51 122.60 115.30 108.54 102.26 96.41 90.95 85.83 81.04 76.53 72.29 68.28 64.50 60.92

24

37.00% 150.83 141.25 132.49 124.42 116.99 110.10 103.71 97.76 92.21 87.02 82.15 77.57 73.27 69.21 65.38 61.75

38.00% 153.23 143.45 134.50 126.28 118.70 111.69 105.18 99.13 93.49 88.22 83.28 78.63 74.27 70.15 66.27 62.59

39.00% 155.68 145.69 136.55 128.17 120.44 113.30 106.69 100.53 94.80 89.44 84.42 79.71 75.28 71.11 67.17 63.44

40.00% 158.19 147.98 138.65 130.10 122.22 114.95 108.21 101.95 96.12 90.68 85.58 80.80 76.31 72.07 68.08 64.31

41.00% 160.76 150.32 140.79 132.06 124.03 116.62 109.77 103.40 97.47 91.94 86.76 81.91 77.35 73.06 69.01 65.18

42.00% 163.38 152.71 142.98 134.07 125.88 118.33 111.35 104.87 98.84 93.22 87.96 83.03 78.40 74.05 69.95 66.07

43.00% 166.07 155.15 145.21 136.11 127.76 120.07 112.96 106.36 100.23 94.52 89.17 84.17 79.48 75.06 70.90 66.97

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ESOP

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol Current Stock Price Risk Free Rate Current Div idend Yield Annualized St. Dev. of Stock Returns

Range of Number Outstanding Options of Shares (M) 16.68

Total

FDX 64.85 4.29% 0.44% 23.00%

Av erage Ex ercise Price 78.09

16.68 $

Av erage Remaining Life (yrs) 5.90 $

78.09

5.90 $

B-S Value Option of Options Price Granted (M) 14.94 $ 249.12

16.00

$

249.12

Share Change

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding Number of Options Outstanding (shares): Average Time to Maturity (years): Expected Annual Number of Options Exercised: Current Average Strike Price: Cost of Equity: Current Stock Price:

$ $

Increase in Shares Outstanding: Average Strike Price: Increase in Common Stock Account:

$

Change in Treasury Stock Expected Price of Repurchased Shares: Number of Shares Repurchased:

$

Shares Outstanding (beginning of the year) Plus: Shares Issued Through ESOP Less: Shares Repurchased in Treasury Shares Outstanding (end of the year)

17 5.90 3 78.09 8.39% 64.85 2008E 3 78.09 $ 221

2009E 3 84.64 $ 239

2010E 3 91.74 $ 259

2011E 3 99.43 $ 281

2012E 3 107.77 $ 305

CV 3 116.81 330

150 64.85 $ 2

165 70.29 $ 2

175 76.18 $ 2

180 82.57 $ 2

180 89.50 $ 2

180 97.01 2

312 3 2 313

313 3 2 313

313 3 2 314

314 3 2 314

314 3 2 315

25

315 3 2 316