United Parcel Service, Inc

Stock Information Symbol Recent Price Beta Market Cap P/E (ttm) Short Ratio NYSE:UPS $76.47 0.91 $75.78B 21.97 2.80
Supply Chain & Freight 21% Domestic Package 58% Intl Package 21%

Revenue by Segment

12 mo. Range $56.47$77.00 Price Target $88.43

February 22nd, 2011 Monideepa Chakravorty Alex Khan Joe Hilborn

TTM performance of NYSE:UPS vs S&P500 (UPS top trend line, S&P500 bottom trend line)

Reasons to buy UPS

Strong growth in overseas markets Pricing power to increase rates and pass on higher energy costs Potential for dividend income (2.72% yield) Expansion into new profitable business segments including supply chain management and healthcare logistics Projected growth in world air freight High operating margins

Recommendation: Buy 900 shares of UPS at a NAV of $68,814

Table of Contents
Qualitative Analysis Investment Thesis ........................................................................................................................................... 2 Company Business Model .............................................................................................................................. 3 Strategy ........................................................................................................................................................... 4 SWOT ............................................................................................................................................................. 5 Recent Alliances/Partnerships ........................................................................................................................ 6 Recent News ................................................................................................................................................... 6 Surprise Analysis ............................................................................................................................................ 8 Z-Score Analysis ............................................................................................................................................ 9 Industry Analysis .......................................................................................................................................... 10 Porters Five Forces ...................................................................................................................................... 11 Macroeconomic Analysis ............................................................................................................................. 12 Competitors .................................................................................................................................................. 13 Quantitative Analysis Financial Ratios ............................................................................................................................................ 14 Dividend Growth Model............................................................................................................................... 20 Pro Forma Income Statement ....................................................................................................................... 21 Valuations P/E ......................................................................................................................................................... 22 P/S.......................................................................................................................................................... 24 EV/EBITDA .......................................................................................................................................... 25 DCF ....................................................................................................................................................... 26 Price Target .................................................................................................................................................. 28 Conclusion .................................................................................................................................................... 28 Appendix ...................................................................................................................................................... 29

QUALITATIVE ANALYSIS Investment Thesis

UPS Comparative Advantage
End-to End Global Service Portfolio: UPS is the only competitor in the industry that handles all levels of service (express, ground, domestic, international, commercial, residential) through its integrated pickup and delivery network. Sustainability1: UPS utilizes vehicles that operate on compressed natural gas, liquefied natural gas, propane, hydrogen fuel cell, electric and hybrid electric power plants. Customizable Supply Chain Solutions: Has a variety of logistics partnerships with retail, healthcare and high tech companies like Amazon, Merck and Toshiba. Tracking-and-Tracing IT Platform: Consistently investing in Information Technology to give customers better knowledge of tracking their packages. They have recently enhanced tracking to include more descriptive statuses and special messaging to inform of unexpected delays. Brand Equity: Built a leading and trusted brand that stands for quality service, reliability and product innovation. It is synonymous with parcel delivery and logistics. In 2010, UPS was ranking #16 among the 100 most valuable global brands.2 Financial Strength: UPS has demonstrated high capital efficiency and strong cash flow generation throughout its history. Despite its vast network, UPS has been able to produce high end returns, with a six-year average ROE of 28% vs. 10% for FDX. The ability of UPS to consistently grow cash will allow the company to maintain growth through internal initiatives, make acquisitions, maintain an attractive dividend, and continue aggressive share buybacks.

Why Now?
Economic Turnaround: UPS volumes trend with the economy, which is rebounding in all regions. In 2009 and 2010, UPS instituted a number of cost savings initiatives across the company which becomes more evident in 2011when there is margin expansion and more leverage to the bottom line. In fact, management is forecasting 2011 to exceed the peak earnings level recorded in 2007. International growth: UPS provides shipping and logistics services all over the world and will benefit from global trade trends. There is specifically a high potential for growth in Asia. In 2010, the company increased capacity out of Asia by over 40% to capture demand. In 2011, UPS is adding additional capacity by expanding their air fleet, adding two 747-400s as well as five additional 747s. The decision to expand their air fleet shows that UPS expects to see continued market share gains in 2011 across the International and Freight divisions. Many companies are expanding to the use of airfreight to better manage lean inventories and their supply chain and as a way to minimize warehousing and other costs associated with maintaining large inventories. This growth in airfreight would be a significant shift since only 2-3% of the worlds international freight is carried on a plane. Cash Position: Uses of cash for 2011 include share repurchases of up to $2 billion which is up from the $800 million in 2010 and capital expenditures of $2.2 billion. Dividends are also a high priority for UPS and are expected to roughly increase at a rate of 2.53%.3 Long term play: While 2011 may not be the most groundbreaking year, UPS will see gains and ultimately will see operating margins at the levels they were before the financial crisis. UPS appears to be in the early stages of operating margin recovery, rebounding from 2009 lows. Currently UPS is 300 bps below its peak consolidated operating margin of 14.4% posted in 2005. Also, DHLs exit from the domestic market give UPS higher pricing power.

1 2

UPS Fact Sheet Millward Brown Optimor Ranking 3 Q4 Earnings Conference Call

Risks
Slowdown in global economy: The amount of operating leverage UPS has could reverse any positive trends. Recent efforts to increase yields could be damaged if there is softer demand as package volumes and a move to lower yielding services would apply pressure to both margins and yields. UPS may find it difficult to meaningfully cut costs because of the breadth of its network if there is another downturn. Economic cyclicality: The transportation industry is subject to cyclical factors, including economic condition, customers business conditions, credit markets, and seasonal patterns, which may adversely affect customer shipping volumes and industry freight demand. E.U. Credit Issues: With roughly 25% of UPSs revenue as international, with more focus on Europe, E.U credit issues could hinder UPSs international growth plans. Rising Labor Costs4: UPSs model is labor intensive with compensation accounting for 60% of operating expenses. Also, almost 60% of UPS workers are unionized through Teamsters and the current contract expires in 2013. The last union-organized strike was in 1998. Fluctuating Fuel Prices: Higher prices coupled with lower demand would impact the margins negatively as consumers may look for lower-cost but SLOWER parcel delivery methods.

Company Business Model

UPS
United Parcel Services (UPS) is the premier source for global transportation and logistics solutions. Founded in 1907, UPS has navigated successfully through several recessions and was able to reinvent itself throughout the century. UPSs logistics model is built on a hub and spoke network for pickup, delivery and sorting terminals across the U.S. and the world. The companys largest domestic hub is in Louisville, KY with major international hubs in Cologne, Germany and Taipei, Taiwan.

Company Segments (Percentage of 2010 Q4 Revenue)

U.S. Domestic Package (60%) Ground (70%) Deferred (10%) Next Day Air (20%) International Package (22%) Export (74%) Cargo (5%) Domestic (21%) Supply Chain and Freight (18%) Forwarding & Logistics (69%) Freight (26%) Other (5%)

Sources of Revenue
1. U.S. Domestic Package5: This group provides guaranteed air and ground delivery of small packages, documents, and time definite delivery of heavy weight packages to the entire U.S. In 2010, revenue rose 7% YoY to $8.1 billion. Margin expansion was driven by strong growth in volume, higher yields, and improved efficiencies. Average daily volume inched up 1.7% YoY on strong growth in Ground and Next Day Air. As evident in the graph above, UPS Ground, a component of Domestic Packages is strengthening in Avg Daily Packages.
4 5

Lazard Report Q4 Company Presentation

2. International Package6: This segment provides air and ground delivery, both domestic and export, to more than 200 countries and territories. UPS provides guaranteed express delivery to over 50 countries outside of the U.S. In 2010, revenue and operating profit increased 9.2% and 15% YOY, respectively. Export average daily volume rose 8.7% year over mainly from more than 30% export growth in China. Exports from Europe showed solid performance with double-digit growth in Germany. As seen in the figure below, international exports are growing at a rapid rate.

3. Supply Chain & Freight: The supply chain group provides freight forwarding, logistics, distribution, customs brokerage, capital, and other services to various industry verticals and customers around the world. The freight segment provides nationwide regional, inter-region and national Less-than-Truckload service across the U.S., Canada, Mexico, and other territories. Over the year, revenue climbed 12. 8%. Profits increased on stronger revenue in UPS Freight as well as the Forwarding and Logistics business.

Strategy
Operating Margins: DHL and the recession challenged UPSs pricing power in the past three years, especially in the Domestic market. However DHL exited the market in 2009 and the economy is recovering. UPS focuses on returning on historic margin levels in the domestic business by cutting costs and creating greater efficiencies in their network. Continue International Expansion7: While international revenue is roughly 22% of total revenue we see potential growth. In 2010, international volume increased 13.6% to a record 2.3 million packages per day and airlift out of Asia increased 40%. While nearly 50% of international revenue is from Europe, Asia is UPSs main focus for growth. At the beginning of fiscal 2010, UPS added a new air hub in China and has already seen growth in demand. In fact, in UPS is set to buy freighter capacity in 2011 to capture the airfreight demand internationally. Increase Success of Customized Supply Chain Solution: UPSs growth strategy is to increase the number of customers benefiting from supply chain solutions, particularly in the healthcare, retails, and high tech sectors, and to increase the amount of small package transportation from these customers. UPS intends to leverage small package and freight customers through cross-selling the full complement of UPS services. Healthcare Supply Chain: An aging population is putting pressure on the healthcare systems around the world. Besides delivery speed, strict temperature control, chain of custody and other regulations must be used to ensure quality and reliability of every delivery. In the past four years, UPSs healthcare facility footprint has doubled, signaling a surge in growth of customer needs.

6 7

Q4 Company presentation BB&T Report

Healthcare is a fast-growing sector and UPSs capabilities match well to the needs of the sector. Today, UPS has nearly 30 healthcare facilities in Asia, Europe, Canada, and the U.S and are continuing to invest and expand their footprint in this industry.

SWOT Analysis
Strengths
Sustainability: UPS is the environmental leader in the U.S. package delivery industry. UPS reduces its carbon footprint through its integrated network, modern airfleet, alternative fuel sources, and extensive use of rails. Network: UPS has an established network and continues to make investments to expand its network, especially in China. Superior Financial Strength: UPS is known for maintaining higher operating margins than its competitors. It is highly profitable, averaging a 28% ROE for the past six years. Dividend Value Strength: Has consistently increased dividends annually with the exception of 2009, at which it was kept constant. Since 2000, Dividend yield has increased by an average of 2.53% annually. Brand Equity: UPS is synonymous with parcel delivery. The brown color scheme of its logo and delivery trucks is iconic to the delivery industry. Brand Lag: While UPSs brown trucks are recognizable, people may not have a complete picture of UPSs full range of capabilities. Unionization: UPSs labor force is unionized and has therefore impacts UPSs labor costs. The threat for strikes could pressure UPS to increase wages. Debt: UPS has higher debt financial ratios than its competitors. However, with the

Weaknesses

Opportunities:
Olympic Games: Selected to manage the transportation and logistical operations of the London Olympic Games in 20128 Business to Business Growth: Increase in B-to-B growth will help expand operating margins due to economies of scale. Asian Market: By increasing customers expectation of higher quality products, UPS has the potential to expand in a fragmented Asian market. They first infiltrate the market by partnering with a key business player in the market with a focus on exports/imports. After this, they will pursue acquisitions and more of a domestic play. Logistics Solutions Business: UPS leverages its network by providing logistics solutions for retail and manufacturing companies. This growing business had been expanding double digits pre-recession and in 2009 these revenues decreased by 20%. However, this has recently reversed due to their We Love Logistics campaign. Global Healthcare Distribution Network: New facilities are being added in the U.S., Asia, Europe, and Canada to accommodate rapid growth in healthcare. Yield Growth: While DHL, who had priced down the market, left the U.S. parcel market more than two years ago, we believe that full pricing power was partially delayed since shipper contracts are usually 1-3 years. Therefore, UPS could be increasing profit margin by having more price control. United States Postal Service Volume Decline: Over the last 10 years, the USPS has steadily lost share to UPS and FedEx. Their continued decline could yield modest volume gains for UPS

2009 UPS Annual Report

Threats9
Rising Fuel Prices: UPS charges fuel surcharges to their domestic and international package and LTL services as their primary means of reducing the risk of adverse fuel price changes. They also periodically enter into option contracts on energy commodity products to manage price risks associated with forecasted transactions involving refined fuels like jet fuel. Challenging Weather Conditions: Bad weather can hurt volume and impact efficiency in delivery of goods. In addition, bad weather can impact retail sales and other groups UPS partners with which may hurt revenues. While UPS cannot control the weather, they have improved their tracking platform for customers by providing more information and an updated delivery time to customers in the event of unexpected delays. Currency Headwinds: Currency translation headwind within their international business could impact cost inflation. However, UPS has delivered strong cost side and margin performance in 2010 that we believe makes them competitive with others in the industry. With over a century of experience, we believe UPS has expertise in foreign currency hedging activities using derivate financial instruments like currency forward contracts and currency options. Pension Fund Liability: In 2007, UPS added $6.1 billion in debt to restructure pension program. If the fund is not producing adequate returns, UPS is obligated to pay from their operating income to meet required distributions.

Recent Alliances/Partnership
London 2012 Olympic Games: UPS will serve as the Official Logistics and Express Delivery Supporter of the 2012 Olympic Games. UPS will be responsible for the pick-up and delivery of everything from documents to heavy freight as well as the operation and management of the Games Logistics and Command Centre, where all the materials associated with the Games will be inventoried, warehoused and processed. In addition, UPS will provide logistics planning services to ensure optimal efficiency in the Olympic supply chain and customs to get shipments cleared through customs quickly and efficiently. UPS Trackside: UPS is the official express delivery company sponsor for NASCAR and will deliver to vendors, NASCAR family members, and to NASCAR equipment. This partnership is from middle of February to November 2011. Red Cross: UPS will take part in a charitable initiative to increase Logistics Emergency Teams for American Red Cross chapters. Through this effort, UPS will provide logistics expertise, transportation and warehousing to local Red Cross Disaster Servicers Coordinators in the event of a large, scale emergency.

Recent News
MANAGEMENT GUIDANCE
On February 2nd, UPS announced almost a 44% improvement in earnings over the prior year period. Global revenue grew 8.4%, increasing adjusted operating profit by almost 40%. Management will also place high priority on service and technology enhancements for 2011. This includes higher visibility to customers by providing more tracking information details like a status bar and special messages for unforeseen events.

Q3 2010 Report

In a recent earnings call, management expected to increase share repurchase substantially from $800 million in 2010 to $2 billion in 2011.

GLOBAL EXPANSION
UPS Express Freight goes to Israel and Slovakia. The expansion of service lets it serve expanding hubs for high-tech, industrial and automotive companies. Israel is a key destination in the high tech sector, which major players in the industry maintain operation in the county. Slovakia has developed as a key center for automotive and industrial manufacturing, representing manufacturing operations of some of the worlds largest auto makers.10 UPS Capital, the financial services arm of UPS has plans to expand its Latin American presence by opening new offices in Bogota, Colombia and Lima, Peru to help facilitate global trade. This would impact the Other segment of Supply Chain & Freight, which has the most growth potential. (helps give loans to qualified international businesses) In addition, UPS has also bought 7 new planes, a sign of growing demand and a need to increase their capacity.

FRANCHISE EXPANSION
The UPS Store, a system of independently owned retail shops for shipping, print and other business services, has lined up nearly $23 million in loans for franchises and expects new credit access to spur 40% more store openings this year than in 2010. They have set an aggressive goal to sell 120 new franchises in the U.S. for 2011. More stores will be added in nontraditional locations such as in hotels or college campuses. An increase in franchises would provide growth for the Other segment component of Supply Chain & Freight. As of last quarter, this segment contributed around 17% to quarter revenues.

HEALTHCARE SECTOR GROWTH11

UPS is seeing increased demand from healthcare manufacturers wanting more agile supply chains. In January, UPS announced a significant expansion of global healthcare distribution facility networks to accommodate continued rapid growth in its healthcare business. The new facilities will be located in Kentucky, Singapore, Venlo (the Netherlands), Burlington (Canada). All of these facilities are strategically located near international and UPS air hubs.

10 11

www.bizjournals.com UPS Press Release: January 4, 2011

WE LOGISTICS CAMPAIGN
Since September 2010, UPS has started a new advertising campaign to demonstrate how it has vaulted past competitors to offer the broadest range of logistics services in the industry and will focus on the theme We Love Logistics to reflect UPSs passion for delivering transportation and supply chain solution that can help both large and small businesses compete better. This is UPSs first campaign that advertises for all of their global services. The purpose for this is to associate a new definition to logistics and to show the complex system and network involved to make it successful. In Fall 2010, this campaign debuted in the U.S., China, the U.K., and Mexico. It will debut in other markets around the world in the beginning of 2011.

Surprise Analysis12

In the past six quarters, UPS has beat market EPS expectations. In the four most recent quarters UPS has beaten EPS estimates by more three cents or moreleading to more than a 2.6% surprise. Surprise analysis is important, because typically when there are positive EPS surprises, the share price will increase. Also, a positive surprise may imply that the market is undervaluing the stock and that the company is performing and exceeding expectations.

12

Reuters

Z-Score Analysis13
One of UPSs weaknesses is its use of debt which has steadily risen over time. Therefore, based on this long term debt trend, we decided to perform a Z-Score Analysis to assess the probability of UPS going bankrupt in the next two years. Altmans equation is: Z = 0.012T1 + 0.014T2 + 0.033T3 + 0.006T4 + 0.999T5 Where, T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = EBIT/ Total Assets T4 = Market Value of Equity / Book Value of Total Liabilities T5 = Sales/ Total Assets

Variable Inputs
Working Capital Retained Earnings EBIT Sales MV of Equity Total Assets BV of Liabilities 2009 3036 12745 3811 45297 57025.78 31883 24187 2010 Q3 3955 13603 5325* 48501* 66089.79 32907 24381

Zones of Discrimination: Z > 2.99 -Safe Zones 1.8 < Z < 2.99 -Grey Zones Z < 1.80 -Distress Zones

Using this equation, we calculated a Z-Score for year end 2009 and the year end 2010 Q3. 2009: 1.2(.095) + 1.4(0.4) + 3.3 (0.12) + 0.6(2.358) + 0.999(1.421) = 3.902 2010 Q3: 1.2(0.12) +1.4(0.413) + 3.3 (0.162) + 0.6 (2.711) + 0.999(1.474) = 4.356
While debt rises, UPS bolsters even further into the safe zone and decreases the probability of UPS going bankrupt. A large part of its safety status is driven by EBIT and Sales and its overall operational improvements in operating margin, network efficiency, and cost reductions. Its profitability strength allows UPS to increase its use of debt. Therefore, we do not see UPSs use of debt as a weakness.

13

Edward Altman, UPS 2009 10k, UPS 10Q * 2009 Q4 was used to adjust for EBIT and Sales figures in 2010 Q3

Industry Analysis

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UPS is in the air delivery and freight services industry. This is a broad industry and is made up of logistics companies such as UPS, state-owned postal systems, the cargo divisions of airlines, and other logistics and freight companies.

Industry Trends

The industry has and will continue to experience growth as firms turn to outsource their operations to third party logistics companies. Additional need for freight will come as the demand for shipping consumer goods grows with a shift towards e-commerce and online shopping. Some companies, such as UPS, have grown and transformed their business to encompass a wider view of the logistics process to create a competitive advantage and boost revenues. For example, the two largest players in the industry, UPS and Fedex, have both created drop-ship solutions by integrating their operations with warehouses of online retailers, such as Amazon.com15. Managing the entire logistics process allows customers to focus on core business and the industry to achieve greater economies of scale There is a growing market for healthcare industry logistic solutions. UPS has 3 million sq ft of warehouse space that is compliant with health regulations and standards. This includes managing new orders and accounts receivable.16 In the worldwide shipping market, Fedex and UPS dominate business, accounting for more than 80% of revenues In local metropolitan markets, the industry is much more fragmented due to small-volume and limited-footprint couriers. This difference between geographic markets exists because of the barriers to entry: larger companies require more capital expenditure for investments such as aircraft, vehicles, and warehouses while local companies have less fixed capital needs and primarily increase labor as their business increases.

Market Players

Alliances and Competition

The delivery portion of the shipping business faces both competition and alliance from the postal system. In the United States, USPS has increasingly become a competitor to shipping companies business as they have also moved away from exclusively letter delivery and expanded offerings in package and freight shipments. USPS has forged alliances with its competitors to tender packages to Fedex for some delivery routes including international shipments.

14 15

http://trinity.firstresearch-learn.com/industry.aspx?chapter=0&pid=408 Amazon.com 2009 Annual Report 16 http://www.ups-scs.com/solutions/healthcare.html

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Porters Five Forces

New Entrants Low

UPS has established brand equity Long term contracts with corporate customers Capital intensive industry that involves aircraft, vehicles, software, and warehouses

Substitutes Medium
Some customers with non-time sensitive logistics needs can trade down to using slower and less expensive delivery options, such as USPS Firms may create their own in-house supply chain and logistics solutions rather than outsourcing the operations to a company such as UPS Threat to letter delivery business as a result of a movement towards electronic documents

Supplier Power Low

UPS does not rely on specific suppliers to operate their business outside of major capital expenditures

Buyer Power - Medium

Smaller customers have less ability to negotiate prices because prices are fixed Larger companies using full logistics solutions have more pricing power due to the ability to negotiate long term contracts

Competitive Rivalry - High

Closest competitor, Fedex, has similar offerings in freight and logistics business UPS focuses on growth overseas and expansion in supply chain business Comparable prices across industry

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Macroeconomic Analysis
Economic Outlook for 201117,18
The January report from the Bureau of Labor Statistics reported that the unemployment rate fell to 9.0%. Some of this decline is related to people leaving the job market and stopping their search for employment rather than an increase in the employment rate. Overall employment in most industries remained fairly constant Employment in retail trade, healthcare, and manufacturing segments experienced the largest amount of growth. Growth in manufacturing jobs is favorable for economic growth, as indices such as PMI are leading indicators of economic growth. Rapid increase in many commodity prices forecasted, including that of energy prices The United States had positive GDP growth in the second half of 2009 and all of 201019 The Federal Reserve raised their projection of GDP growth in 2011 to 3.9%20

UPS in the Economy

Manufacturing growth in not only favorable for the economy as a whole, but UPS will directly benefit and larger quantities of manufactured goods enter their logistics chain to reach their destinations Rising energy costs have the potential to impact profits in the companys delivery business UPS is able to stabilize cash flows related to variable energy costs by hedging using futures contracts as well as an additional fuel surcharge to pass on higher costs to their customers Expansion in healthcare jobs is positive and coincides with UPS goals to increase their Global Healthcare Network, a new area of profit for the company

17 18

http://www.ism.ws/ismreport/mfgrob.cfm http://www.bls.gov/news.release/pdf/empsit.pdf 19 http://www.bea.gov/national/index.htm#gdp 20 http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20110126.pdf

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Competitors
FedEx Corporation21
(NYSE:FDX) operates several business segments that compete directly with UPS including Fedex Express, FedEx Services, and FedEx Ground. The company provides various solutions for transportation and delivery, logistics, e-commerce, and business services. The company provides various package delivery and outsourced business services. FedEx SmartPost is a subsidiary of FedEx ground that contracts with the United States Postal System transport deliveries across regions.

CH Robinson Worldwide, Inc22

(NASDAQ:CHRW) is a third party logistics provider that contracts with transportation companies around the world to arrange logistics services for their customers. CHRW does not own any of the transportation systems to move freight, but instead mixes and matches various offerings from their contractors with customer needs to create what they call multimodal transportation services. They also have a business services unit that provides supply-chain analysis and information reporting.

Expeditors International of Washington Inc23

(NASDAQ: EXPD) provides logistics services. Their two main sources of revenue come from air freight and ocean freight services. In both operations, they find the optimal carrier for the cargo based on the customers needs, including time schedules, cost, and destinations. EXPD also operates a customs brokerage service for goods moving across borders by air, sea, rail, and truck. Operations of their customs business, which account for 41% of the companys revenue, include arranging inspection, paying import taxes on behalf of the client, and warehousing and product distribution.

21 22

http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=FDX http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=CHRW.O 23 http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=EXPD.O

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Quantitative Analysis Financial Ratios24

Liquidity: Good
UPS Liquidity Trend Current Ratio Quick Ratio Cash Ratio 2005 1.65 1.65 0.47 2006 1.40 1.40 0.30 2007 1.20 1.20 0.26 2008 1.13 1.13 0.13 2009 1.49 1.49 0.34 2010 1.95 1.95 0.68

Current Ratio Quick Ratio Cash Ratio

Peers Companies Recent Fiscal Year 2010 2009 2009 FDX CHRW EXPD 1.57 1.79 2.52 1.57 0.42 1.79 0.46 2.52 1.31

Comparisons Peer Average 1.96 1.96 0.73 S&P Average .82 .52 2010 UPS 1.95 1.95 0.68

Liquidity Rankings Current Ratio 2nd 4th 3rd 1st 5th Quick Ratio 2nd 4th 3rd 1st 5th Cash Ratio 2nd 4th 3rd 1st Total 2nd 4th 3rd 1st 5th

UPS FDX CHRW EXPD S&P 500

Since the global recession, UPS has seen great improvement in its liquidity ratios. In 2010, liquidity ratios raised above its six year highs in 2005. UPS accomplished this despite spending more on its main U.S. hub expansion in the first half of 2010 and in opening a new intra-Asia hub in Shenzhen, China. UPS achieved this in large part due to the improving economy which helped volume and revenue trends, as well as the cost containment initiatives and efficiencies implemented over the past few quarters. Also, the new business improvements added to greater efficiencies in their network and reduced time in transit for shipments in the region. The quick and current ratios are the same for UPS because they do not have any inventory; they are a services company.

24

Yahoo Finance, Reuters, Annual Reports

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Asset Management: Good

UPS Asset Management Trend Day Sales in Inventory Average Collection Period Fixed Asset Turnover Total Asset Turnover 2005 52.029 2006 47.094 2007 47.467 2008 42.142 2009 44.951 2010 -

2.79 1.22

2.83 1.43

2.81 1.27

2.82 1.62

2.52 1.42

2.85 1.47

Peer Companies Recent Fiscal Year 2010 FDX 43.147 2009 CHRW 42.073 2009 EXPD 71.289 Peer Average 52.17

Comparisons S&P Average 47.46 2010 UPS 44.95125*

Day Sales in Inventory Average Collection Period Fixed Asset Turnover Total Asset Turnover

2.41 1.39

64.38 4.13

8.26 1.76

25.02 2.43

.46

2.85 1.47

Asset Mgmt Rankings UPS FDX CHRW EXPD S&P 500 ACP 3rd 2nd 1st 5th 4th FATO 3rd 4th 1st 2nd TATO 3rd 4th 1st 2nd 5th Total 2nd 4th 1st 3rd 5th

Fixed Asset Turnover has maintained above 2.5 in the past six years and reached record high levels in 2010. While 2010 FATO is a little bit above the standard for the past 6 years, it shows significant improvement from 2009 levels. This is especially important as it is evident that UPS is improving its use of fixed asset investments from recent expansion asset additions which were supposed to improve business efficiencies. UPSs unique business model all packages go through one integrated networkcreates efficient use of assets and has allowed UPS to maintain high operating margins. While UPS has maintained decent TATO and superior TATO compared to the S&P average, we believe there is still much room for improvement. As the economy improves, UPS will have better generation of revenues and will increase its operating margins to pre-recession levels.

2009 ACP figures are used for UPS

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Debt Management: Below Average

UPS Debt Management Trend Debt Ratio Debt/Equity Ratio Times Interest Ratio Average Payment Period 2005 .11 .24 35.32 17.843 2006 .12 .27 30.85 16.2 2007 .28 .90 1.75 13.333 2008 .31 1.46 11.35 14.485 2009 .30 1.25 7.56 15.321 2010 .31 1.30 15.6 -

Debt Ratio Debt/Equity Ratio Times Interest Ratio Average Payment Period

Peer Companies Recent Fiscal Year 2010 2009 2009 FDX CHRW EXPD .07 .01 .12 .01 23.97 16.738 3106 27.249 810.61 53.086

Comparisons Peer Average .04 .07 1313.58 32.357 S&P Average .60 1.5 16.28 2010 UPS .31 1.3 15.6 15.321*26

Debt Mgmt Rankings UPS FDX CHRW EXPD S&P 500 Debt 3rd 2nd 1st 4th D/E 3rd 2nd 1st 4th TIER 4th 3rd 1st 2nd 5th APP 4th 3rd 2nd 1st Total 4th 3rd 1st 2nd 5th

UPS fairs poorly compared to its competitors and the market. Debt use has been slowly rising over time in comparison to assets and equity and at levels worse than most of its competitors. There was slight improvement from 2008 to 2009, but we believe this is correlated to conservative spending during the economic recession. However, while debt levels rise, UPS is able to cover its interest payments by almost 16 times, almost double the amount from 2009 and a vast improvement from the past three years. By debt levels increasing slightly in 2010, we take this as a sign of advancement and UPSs increased priority for investment and expansion.

2009 APP is used for UPS comparisons

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Profitability: Excellent
Operating Margin Net Profit Margin Return on Assets Return on Equity 2005 14.43% 9.09% 11.07% 22.92% 2006 13.95% 8.84% 12.65% 27.14% UPS Profitability Trend 2007 2008 1.16% 10.45% 0.77% 0.98% 3.14% 5.83% 9.42% 44.29% 2009 8.39% 4.75% 6.75% 28.20% 2010 11.86% 7.04% 10.36 43.15%

Operating Profit Margin Net Profit Margin Return on Assets Return on Equity

Peer Companies Recent Fiscal Year 2010 2009 2009 FDX CHRW EXPD 5.75% 7.75% 9.41% 3.41% 4.75% 8.57% 4.76% 19.67% 33.41% 5.87% 10.34% 15.47%

Comparisons Peer Average 7.64% 4.68% 11.59% 18.94% S&P Average 10.9% 5.1% 14.2% 2010 UPS 11.86% 7.04% 10.36% 43.15%

Profitability Rankings UPS FDX CHRW EXPD S&P 500 OPM 1st 4th 3rd 2nd NPM 2nd 5th 4th 3rd 1st ROA 2nd 5th 1st 3rd 4th ROE 1st 5th 2nd 3rd 4th Total 1st 5th 2nd 3rd 4th

Profitability is definitely one of UPSs strengths. In 2010, margins recovered from recessionary price cutting. UPSs operating margin power shows superior in comparison to its peers, while its ROA and ROE far exceed S&P averages. While there has been margin improvement, they are still below historical six year highs for UPS, showing that there is still room for improvement. As the economy recovers, we see UPS increasing margins as it receives more volume and more pricing power.

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Extended DuPont: Excellent

UPS DuPont Trend Net Profit Margin Total Asset Turnover Equity Multiplier Return on Equity 2005 3.41% 1.22 2.07 22.92% 2006 4.76% 1.43 2.15 27.14% 2007 5.87% 1.27 3.20 3.14% 2008 4.68% 1.62 4.70 44.29% 2009 10.9% 1.42 4.18 28.20% 2010 7.04% 1.47 4.17 43.15%

NPM TATO EM ROE

Peer Companies Recent Fiscal Year 2010 2009 2009 FDX CHRW EXPD 3.41% 4.76% 5.87% 1.39 4.13 1.76 1.80 1.70 1.50 8.57% 33.41% 15.47%

Comparisons Peer Average 4.68% 2.43 1.67 18.94% S&P Average 10.9% .46 2.5 14.2% 2010 UPS 7.04% 1.47 4.17 43.15%

Extended DuPont Rankings UPS FDX CHRW EXPD S&P 500 NPM 2nd 5th 4th 3rd 1st TATO 3rd 4th 1st 2nd 5th EM 1st 3rd 4th 5th 2nd ROE 1st 5th 2nd 3rd 4th Total 1st 5th 2nd 4th 3rd

While UPSs leverage may be a concern in comparison to its peers, its profitability and ROE to investors is far superior. From this model it is evident that ROE is most impacted by the fluctuations in Net Profit Margin and the Equity Multiplier. As the economy picks up in 2011 and 2012, we expect profit margins to increase as UPS will have higher pricing capability and see the impact/benefits of cutting costs and improving efficiencies during the recession.

ROE
50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2005 2006 2007 3.14% 2008 2009 2010 22.92% 27.14% 44.29% 28.20% ROE 43.15%

18

Financial Ratio Graphs

Liquidity Ratios
2.50
2.00 1.50 1.00 0.50 0.00 2005 2006 Current Ratio 2007 2008 2009 Cash Ratio 2010 3.00 2.50 2.00 1.50 1.00 0.50 0.00

Asset Management

2005

2006

2007

2008

2009

2010

Quick Ratio

Total Asset Turnover

Fixed Asset Turnover

Debt Management
160.0% 140.0% 120.0% 100.0% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2005 2006 2007 2008 2009 2010 2005

Profitability

80.0%
60.0% 40.0% 20.0% 0.0%

2006

2007

2008

2009

2010 ROA

Debt Ratio

Debt/Equity

Cash Flow/Debt

Operating Margin

Net Profit Margin

19

Dividend Growth Model

UPS has consistently paid a very strong dividend relative to its share price meaning that not only would the SMF portfolio benefit from share price appreciation, but also dividend income. Additionally, the growth rate of the quarterly dividends has been consistent and has increased by over 2.5% annually since 2000. UPS significant dividend amount and high yield percentage help to ensure the price of the stock remains relatively high, as a decrease in price would cause the yield to go up, which under normal circumstances, would cause the stock price to correct itself. Using the dividend growth pricing model and assuming a 6.0% required rate of return for the stock and continued dividend growth rate of 2.53% annually, the value of UPS is $75.22. The closeness between the market price and dividend growth model valuation is indicative that this stock is used for dividend income, meaning it is likely that the robust dividend acts as a price support.

20

Pro Forma Income Statement

United Parcels Service, Inc. Consolidated Income Statement (dollars in millions, except per share amounts) 2009 Growth % U.S. Domestic Package Growth International Package Growth Supply Chain & Freight Growth Total Revenue Growth Revenue: U.S. Domestic Package International Package Supply Chain & Freight Total Revenue Operating expenses: Compensation and benefits Repairs and maintenance Depreciation and amortization Purchased transportation Fuel Other Occupancy Other Expenses Total Other Expenses Total operating expenses Operating profit: U.S. Domestic Package International Package Supply Chain & Freight Total operating profit Other income (expense): Investment income (loss) Interest expense Total other income (expense) Income before income taxes Income tax expense Net income $ 10 (445) (435) 3,366 1,214 2,152 $ 3 (354) (351) 5,523 2,035 3,488 $ 1 (434) (433) 6,153 2,154 4,000 $ (444) (443) 6,296 2,204 4,093 $ 1 (459) (458) 6,510 2,278 4,231 1 2,138 1,367 296 3,801 3,373 1,904 597 5,874 3,787 2,140 659 6,586 3,875 2,190 674 6,739 4,007 2,265 697 6,968 25,640 1,075 1,747 5,379 2,365 985 4,305 15,856 41,496 26,324 1,131 1,792 6,640 2,972 939 3,873 17,347 43,671 26,549 1,174 1,838 6,076 3,063 1,021 4,748 17,920 44,469 27,167 1,202 1,881 6,217 3,135 1,045 4,859 18,338 45,505 28,088 1,242 1,945 6,428 3,241 1,080 5,023 18,959 47,047 $ 28,158 9,699 7,440 45,297 $ 29,742 11,133 8,670 49,545 $ 30,039 11,912 9,104 51,055 $ 30,634 12,246 9,364 52,244 $ 31,527 12,692 9,797 54,015 2010 Pessimistic 1% 7% 5% 3.05% 2011 Estimates Most Likely 3% 10% 8% 5.29% Optimistic 6% 14% 13% 8.56%

Per share amounts Basic earnings per share Diluted earnings per share $ $ 2.16 2.14 $ $ 3.51 3.48 $ $ 4.02 3.99 $ $ 4.12 4.08 $ $ 4.26 4.22

21

2011 Pro Forma Income Statement Assumptions

Revenues: In order to forecast revenue growth for 2011, we broke UPSs revenues down into the three main operating segments, U.S. Domestic Package, International Package, and Supply Chain and Freight, and forecasted the growth of each segment separately. U.S. Domestic Package: For the U.S. Domestic Package segment, we made a growth matrix from the revenues spanning back to 2005. The growth matrix is displayed in the Appendix, page 31. Based off of the growth matrix, we assigned growth rates of 1%, 3%, and 5% to our pessimistic, most likely, and optimistic cases respectively. The pessimistic growth rate of 1% is slightly higher than the median growth rate of .78%. Most likely is set at 3% to mimic the U.S. economic growth. The optimistic growth rate of 5% is set slightly below the growth rate from 2009 to 2010, which was 5.63%. International Package: For the International Package segment, we made a growth matrix from the revenues spanning back to 2005. The growth matrix is displayed in the Appendix, page 31. Based off of the growth matrix, we assigned growth rates of 7%, 10%, and 14% to our pessimistic, most likely, and optimistic cases respectively. The pessimistic growth rate of 7% is set slightly higher than the 6.89% median growth rate. Most likely is set at 10% which is slightly lower than the growth rate from the years 2005 to 2008, which we believe more accurately represent UPSs growth opportunities. The optimistic growth rate of 14% is set slightly below the 14.79% growth rate from 2009 to 2010. Supply Chain and Freight: For the Supply Chain and Freight segment, we made a growth matrix from the revenues spanning back to 2005. The growth matrix is displayed in the Appendix, page 31. Based off of the growth matrix, we assigned growth rates of 5%, 8%, and 13% to our pessimistic, most likely, and optimistic cases respectively. The pessimistic growth rate was set at 5% which is slightly lower than the median of 5.55%. Most likely was set at 8% which is half of the growth rate from 2009 to 2010. Optimistic is once again set below the growth rate from 2009 to 2010, which was 16.53%. Total Growth Rate: The total revenue growth rates are 3.05%, 5.29%, and 8.56% for our pessimistic, most likely, and optimistic cases respectively. Total Operating Expenses: Total operating expenses were set at 89.1% of revenue. Of the 89.1%, 52% is attributed to Compensation and benefits. The other 35.1% is attributed to other expenses. Of the other expenses, purchased transportation is the largest taking up 11.9% of the allotted 89.1% of revenue. Total Operating Profits: Total operating profits are broken down as follows: U.S. Domestic Package is 57.5% of total operating Profits, International Package is 32.5% of total profits, and Supply Chain and Freight is 10% of total profits. Income Tax Expense: Income Tax Expense was set at 35% of EBIT based on Valueline estimates. Shares Outstanding: Shares outstanding was set at the current amount of shares outstanding to be conservative because there is no guarantee that UPS will buy back shares.

P/E Valuation
Historical P/E Multiples 2002 2003 28.5 25.9 UPS 19.7 19.3 FDX 27.4 27 CHRW 28.6 31.7 EXPD 26.05 25.975 Averge 2004 26.1 19.6 28.1 32.9 26.675 2005 21.1 18.5 26 32 24.4 2006 19.8 16.3 29.2 41.5 26.7 2007 17.8 16.5 27.2 36.9 24.6 2008 18.4 17 25.9 28.7 22.5 2009 22.6 17.5 24.6 28.7 23.35 Average 22.5 18.1 26.9 32.6 25.0 22

Historic P/E Multiple: Above is a table with the historic P/E multiples for UPS and its peer competitors. UPS has had a higher P/E multiple than FDX, its main competitor, for the last 8 years. However, it has had lower P/E multiples than the other two peers, CHRW and EXPD. From 2002 to 2007 the P/E multiple for UPS has declined, but has started in increase since 2008. We believe this trend will continue and the P/E Multiple will continue to increase slightly in the years to come.

Historical P/E Multiples

45 40 35 30 25 20 15 10 5 0 2002 2003 UPS 2004 FDX 2005 CHRW 2006 EXPD 2007 Averge 2008 2009

Above is a graph of UPS and its competitors P/E multiples dating back to 2002.

P/E Valuation Pessimistic EPS P/E Multiple Price Per Share Probability Weighted Average Price Current Price Margin of Safety $ $ 3.99 18.5 73.77 0.15 $ $ $ Most Likely $ 4.08 21.5 87.73 0.7 87.35 76.47 14% $ Optimistic $ 4.22 23.5 99.14 0.15

P/E Valuation: P/E multiples were set at 18, 21.5, and 23.5 for our pessimistic, most likely, and optimistic scenarios respectively. The pessimistic multiple was set at 18.5 which is about equal to the P/E multiple in 2008. We put a multiple of 21.5 as the most likely which is below the 2009 multiple and also below the average. For optimistic we placed the multiple at 23.5 based on UPS having higher multiples prior to 2005. 23

P/S Valuation
Historical P/S Multiples 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average 3.1 2.75 2.5 2 1.65 1.6 1.5 1.4 2.1 UPS 2.65 1.4 Historic P/S Multiples:We could not locate P/S multiples for the UPSs peer competitors. Above is a table of historic P/S multiples for UPS since 2001.

UPS
3.5 3 2.5 2 1.5 1 0.5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2.65 3.1 2.75 2.5 2 1.65 1.6 1.5 1.4 1.4 UPS

Above is a graph of the P/S multiples for UPS. There has been a trend down in the last eight years, but the trend seems to be leveling out.
P/S Valuation 2011 Revenue Shares Outstanding Sales Per Share P/S Multiple Price Per Share Probability Weighted Average Current Price Margin of Safety $ $ $ Pessimistic 51,055 1003 50.90 1.3 66.17 0.15 $ $ $ Most Likely 52,244 1003 52.09 1.6 83.34 0.7 86.04 76.47 13% $ $ $ Optimistic 54,015 1003 53.85 2.2 118.48 0.15

$ $

P/S Valuation: For our P/S valuation, we divided our 2011 pro forma revenues for each scenario by the number of current shares outstanding (Both revenue and Shares outstanding are in millions). We then multiplied the sales per share by a corresponding P/S multiple. For pessimistic we placed the multiple at 1.3 if the trend continues downward. Most likely we placed a 1.6 multiple which would be a slight increase from the 2010 multiple. For optimistic, we placed the multiple at 2.2, which is slightly above the average multiple over the last ten years.
24

EV/EBITDA Valuation
Historical EV/EBITDA Multiples 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average 14.5 14 12.5 10 9.5 26 14 13.8 UPS 13 11 Historic EV/EBITDA Multiples: Above are historic EV/EBITDA multiples for UPS. We were unable to find EV/EBITDA multiples for their peer competitors.

Historical EV/EBITDA Multiples

30 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 13 14.5 14 14 10 9.5 11 UPS 26

12.5

Above is a graph of the historical EV/EBITDA multiples from 2002 to 2010. There was a significant spike in the EV/EBITDA multiple in 2008. This can be attributed to lag of the low EBITDA of 2007.
EV / EBITDA Valuation EBIT D&A EBITDA EV / EBITDA Multiple Enterprise Value Cash Debt Market Cap Shares Outstanding Price Per Share Probability Weighted Average Price Current Price Margin of Safety Pessimistic 6,586,000,000 1,838,000,000 8,424,000,000 9.00 75,816,000,000 4,081,000,000 10,491,000,000 69,406,000,000 1,003,000,000 73.40 0.15 Most Likely 6,739,000,000 1,881,000,000 8,620,000,000 11.00 94,820,000,000 4,081,000,000 10,491,000,000 88,410,000,000 1,003,000,000 88.15 0.7 89.08 76.47 16.5% Optimistic 6,968,000,000 1,945,000,000 8,913,000,000 13.00 115,869,000,000 4,081,000,000 10,491,000,000 109,459,000,000 1,003,000,000 109.13 0.15

$ $

25

EV/EBITDA Valuation: For our EV/EBITDA, we started with our projected operating profit from each
scenario from our 2011 pro forma income statement. We then added the depreciation and amortization to arrive at the EBITDA value. The depreciation was combined in UPS income statement with amortization under the Other Expenses category. We then multiplied the EBITDA by the EV/EBITDA multiple to arrive at the enterprise value. EV/EBITDA multiples were 9, 11, and 13 for our pessimistic, most likely, and optimistic respectively. Our pessimistic multiple of 9.5 is the lowest multiple for UPS in the last 9 year. Our most likely was set at 11 which was the EV/EBITDA multiple for 2010. Our optimistic was set at 13 which is slightly below the average multiple over the past eight years. For the price per share, we added cash back to the enterprise value. We then divided that number by the number of shares outstanding to arrive at out price per share.

DCF Valuation
Free Cash Flow Calculation Actual 2008 Revenue Growth Revenue EBIT Margin EBIT Taxes NOPAT Plus: D&A Less: Cap Ex Less: Change NWC FCFF 51,486 9.74% 5,015 2,012 3,003 1,814 2,636 1,130 1,051 2009 -12.02% 45,297 7.43% 3,366 1,214 2,152 1,747 1,602 194 2,103 2010 9.38% 49,545 11.15% 5,523 2,035 3,488 1,792 1,389 1,090 2,801 Estimated 2011 5.45% 52,244 12.05% 6296 2,204 4,093 1881 1567 1,149 3,257 2012 5.29% 55,008 12.05% 6,628 2,320 4,308 2,019 1650 1,210 3,467 2013 5.29% 57,918 12.05% 6,979 2,408 4,571 2,126 1738 1,274 3,685 2014 5.29% 60,982 12.05% 7,348 2,535 4,813 2,238 1829 1,342 3,880 2015 5.29% 64,208 12.05% 7,737 2,669 5,068 2,356 1926 1,413 4,085

Free Cash Flow Assumptions:

Revenue: We based revenue growth off of the Pro Forma Income Statement along with consideration from the growth matrixes found in the appendix. Growth for 2011 is 5.45% and decreases to 5.29% for the years 2012 to 2015. EBIT: We based our EBIT off of historical EBIT margins. There has been a trend up in the margin and UPS is expected to continue to improve their EBIT margin in the years to come. Tax Rate: We set the tax rate at 35% of EBIT for the years 2011 and 2012. For the years 2013 to 2015 we lowered the tax rate to 34.5% of EBIT because the increase in international sales should effectively lower the tax rate for UPS. Depreciation and Amortization: For our forecast of depreciation and amortization for 2011 to 2015, we looked at the expenses as a percent of revenue. We used the historical average of 3.67% to forecast our estimates. Capital Expenditures: We looked at historical capital expenditures on the Cash Flow Statement and then set them up as a percentage of revenue. We used a historical average of 3% of revenue.

26

Net Working Capital: We looked at historical net working capital expenditures on the Cash Flow Statement and then set them up as a percentage of revenue. We used a historical average of 2.2% of revenue.
Discounted Cash Flows 2011 FCFF WACC PV of CF Number of Periods $ 1 $ 3,257 8.25% 3,009 $ 2 $ 2012 3,467 8.25% 2,959 $ 3 $ 2013 3,685 8.25% 2,905 $ 4 $ 2014 3,880 8.25% 2,826 $ 5 $ 2015 4,085 8.25% 2,748 $ Terminal Value $ 136,179 8.25% 91,616 5

Discounted Cash Flow Assumptions: WACC: WACC = (% Debt)(Cost of Debt)(1-T) + (% Equity)(Cost of Equity) WACC = (28.6%)(4.77%)(65%)+(71.4%)(10.71%) WACC = (8.25%) Terminal Value: In Order to forecast terminal value for UPS, we used a 3% estimate for our expected steady growth rate of UPSs FCFF in perpetuity. Spreadsheet DCF Valuation PV of CFs PV of TV Enterprise Value Debt Cash Market Cap Shares Outstanding Price Per Share Current Price Margin of Safety $ $ 14,447 91,616 106,063 10,491 4,081 91,491 1,003 91.22 76.47 19%

Spreadsheet DCF Valuation: For our spreadsheet DCF valuation we added together the total present values of each of the yearly forecasts along with the terminal value estimate to arrive at an enterprise value. We then subtracted debt and cash to arrive at market cap. We then divided the market cap by shares outstanding to arrive at an estimated price per share of $91.22.

27

Price Target
Valuation Price Weight Weighted Value Price Current Price Margin of Safety Price Target P/E P/S $ 87.35 $ 86.04 25% 25% $ 88.43 $ 76.47 16% EV/EBITDA $ 89.09 25% DCF $ 91.22 25%

Target Price: For our target price, we weighted each valuation equally at 25%. We arrived at a weighted valuation price of $88.43, which gives us a margin of safety of 16%.

Conclusion
We recommend buying 900 shares of UPS at an approximate NAV of $68,814
We believe UPS has high potential in fragmented emerging markets like China, as evident by its recent expansions in 2010 and its purchase of seven new airplanes in 2011. Air freight transportation is growing here. UPS has high operating margins and will gain even higher profits as the economy recovers and they have higher pricing power in 2011 and 2012. Management has even forcasted 2011 earnings to exceed peek levels in 2007. UPS is growing its Supply Chain and Freight division, using customizable logistics solutions. While they are already utilized for many retail and high tech companies, they are branching out into global healthcare distribution market We believe there is high growth potential for this segment. In January, UPS announced UPS Healthcare facilities expansion in Kentucky, Singapore, Netherlands, and in Canada. UPS operates in a dupology competitive environment, with their only direct competitor being FedEx. Past performance has shown they are able to set prices on rates as well as pass along higher costs of doing business, such as energy price increases. Thec ompanys financial strength has allowed them to generate consistent cash flows across all their business segments and produce a 6-year average ROE of 28%. 2011 EPS is projected to reach an all-time high.

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APPENDIX Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions)
December 31, 2009 2008

ASSETS Current Assets: Cash and cash equivalents Marketable securities Accounts receivable, net Finance receivables, net Deferred income tax assets Income taxes receivable Other current assets Total Current Assets Property, Plant and Equipment, Net Goodwill Intangible Assets, Net Non-Current Finance Receivables, Net Other Non-Current Assets Total Assets LIABILITIES AND SHAREOWNERS EQUITY Current Liabilities: Current maturities of long-term debt and commercial paper Accounts payable Accrued wages and withholdings Self-insurance reserves Income taxes accrued Other current liabilities Total Current Liabilities Long-Term Debt Pension and Postretirement Benefit Obligations Deferred Income Tax Liabilities Self-Insurance Reserves Other Non-Current Liabilities Shareowners Equity: Class A common stock (285 and 314 shares issued in 2009 and 2008) Class B common stock (711 and 684 shares issued in 2009 and 2008) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Deferred compensation obligations Less: Treasury stock (2 shares in 2009 and 2008) Total Equity for Controlling Interests Noncontrolling Interests Total Shareowners Equity Total Liabilities and Shareowners Equity $ 1,542 558 5,369 287 585 266 668 9,275 17,979 2,089 596 337 1,607 $31,883 $ 507 542 5,547 480 494 167 1,108 8,845 18,265 1,986 511 476 1,796 $31,879

853 1,766 1,416 757 258 1,189 6,239 8,668 5,457 1,293 1,732 798

$ 2,074 1,855 1,436 732 37 1,683 7,817 7,797 6,323 588 1,710 864 3 7 12,412 (5,642) 121 (121) 6,780 6,780 $31,879

3 7 2 12,745 (5,127) 108 (108) 7,630 66 7,696 $31,883

29

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (In millions, except per share amounts)
2009 Years Ended December 31, 2008 2007

Revenue Operating Expenses: Compensation and benefits Repairs and maintenance Depreciation and amortization Purchased transportation Fuel Other occupancy Other expenses Total Operating Expenses Operating Profit Other Income and (Expense): Investment income Interest expense Total Other Income and (Expense) Income Before Income Taxes Income Tax Expense Net Income Basic Earnings Per Share Diluted Earnings Per Share

$45,297 25,640 1,075 1,747 5,379 2,365 985 4,305 41,496 3,801 10 (445) (435) 3,366 1,214 $ 2,152 $ 2.16 $ 2.14

$51,486 26,063 1,194 1,814 6,550 4,134 1,027 5,322 46,104 5,382 75 (442) (367) 5,015 2,012 $ 3,003 $ $ 2.96 2.94

$49,692 31,745 1,157 1,745 5,902 2,974 958 4,633 49,114 578 99 (246) (147) 431 49 $ 382 $ 0.36 $ 0.36

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (In millions)
Years Ended December 31, 2009 2008 2007

Cash Flows From Operating Activities: Net income Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Pension and postretirement benefit expense Pension and postretirement benefit contributions Self-insurance reserves Deferred taxes, credits and other Stock compensation expense Asset impairment charges Other (gains) losses Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable Income taxes receivable Other current assets Accounts payable Accrued wages and withholdings Other current liabilities Other operating activities Net cash from operating activities Cash Flows From Investing Activities: Capital expenditures Proceeds from disposals of property, plant and equipment Purchases of marketable securities Sales and maturities of marketable securities

$ 2,152 1,747 872 (924) 47 471 430 181 115 (30) 27 136 (107) (102) 184 86 5,285 (1,602) 60 (2,251) 2,240

$ 3,003 1,814 726 (246) 87 187 516 575 634 197 1,161 (144) 87 44 (184) (31) 8,426 (2,636) 147 (3,391) 3,113

382 1,745 513 (687) 69 (249) 447 221 243 (380) (1,191) (3) (37) 108 56 (114) 1,123 (2,820) 85 (9,017) 9,638

30

Net (increase) decrease in finance receivables Other investing activities Net cash (used in) investing activities Cash Flows From Financing Activities: Net change in short-term debt Proceeds from long-term borrowings Repayments of long-term borrowings Purchases of common stock Issuances of common stock Dividends Other financing activities Net cash provided by (used in) financing activities Effect Of Exchange Rate Changes On Cash And Cash Equivalents Net Increase (Decrease) In Cash And Cash Equivalents Cash And Cash Equivalents: Beginning of period End of period Cash Paid During The Period For: Interest (net of amount capitalized) Income taxes

261 44 (1,248) (1,738) 3,160 (1,944) (561) 149 (1,751) (360) (3,045) 43 1,035 507 $ 1,542 $ $ 390 443

(49) (363) (3,179) (2,016) 3,613 (2,518) (3,570) 169 (2,219) (161) (6,702) (65) (1,520) 2,027 507 359 760

(39) (46) (2,199) 2,613 4,094 (198) (2,639) 174 (1,703) (44) 2,297 12 1,233 794 $ 2,027 $ 248 $ 1,351

$ $ $

Growth Matrixes
2005 Total Revenue 42,581 2006 2005 2006 2007 2008 2009 Median Mean 3.08% 2.22% 11.66% 2006 47,547 2007 8.03% 4.51% 2007 49,692 2008 6.53% 4.06% 3.61% 2008 51,486 2009 1.56% -1.60% -4.52% -12.02% 2009 45,297 2010 3.08% 1.03% -0.10% -1.90% 9.38% 2010 49,545

2005 U.S. Domestic Package Revenue

2006

2007

2008

2009

2010 29,742

28,610
2006

30,456
2007 4.07% 1.74%

30,985
2008 3.02% 1.34% 0.95%

31,278
2009 -0.40% -2.58% -4.67% -9.98%

28,158
2010 0.78% -0.59% -1.36% -2.49% 5.63%

2005 2006 2007 2008 2009

6.45%

31

Median Mean 2005 International Package Revenue 7,977 2006 2005 2006 2007 2008 2009 Median Mean 13.94% 2006 9,089 2007 13.53% 13.11%

0.78% 0.13% 2007 10,281 2008 12.29% 11.47% 9.84% 2008 11,293 2009 5.01% 2.19% -2.87% -14.11% 2009 9,699 2010 6.89% 5.20% 2.69% -0.71% 14.79% 6.89% 6.22% 2010 11,133

2005 Supply Chain & Freight Revenue

2006 8,002 2007 18.56% 5.30%

2007 8,426 2008 14.14% 5.55% 5.80%

2008 8,915 2009 5.55% -2.39% -6.03% -16.54%

2009 7,440 2010 7.66% 2.02% 0.96% -1.38% 16.53%

2010 8,670

5,994
2006

2005 2006 2007 2008 2009

33.50%

Median Mean

5.55% 5.95%

List of International Hubs

Main U.S. Hubs
Louisville, KY Philadelphia, PA Dallas, TX Rockford, IL Columbia, SC Hartford, CT Hamilton, ON Concord, ON Mississauga, ON Mirabel, QC Calgary, AB Vancouver, BC

Europe
Cologne Bonn Airport (Main Hub) East Midlands Airport, UK London Stansted Airport, UK Incheon, Korea Pampanga, Philippines Taipei, Taiwan Hong Kong Shanghai

Asia & Pacific

Canada

32

Winnipeg, MB

Established Clients27
Below is a list of some of UPSs established clients. These were just a few of the ones Diane from Customer Relations revealed to me Merck: Toshiba: Amazon Daimler Chrysler Ford Honeywell General Motors MMM AT&T Wireless Bombardier Caterpillar Carhartt Anixter International IBM JC Penneys Maui Jim Matt Truck Philips Cisco Dressbarn TOYS R US Toyota Xerox Dupont Freightliner Lockheed Martin

Airplanes On Order

27

From a phone interview on 2/14/11 with customer relations associate Diane from UPS Supply Chain Solutions

33

Volume Trends

34

35

UNITED PARCEL SVC. NYSE-UPS

TIMELINESS SAFETY TECHNICAL

RECENT PRICE
62.5 46.2 67.1 54.3

Median: 24.0 P/E RATIO RATIO YLD 68.79 P/E 18.1(Trailing: 21.3) RELATIVE 1.16 DIVD 2.7%
74.9 53.0 89.1 67.5 85.8 66.1 84.0 65.5 79.0 68.7 75.1 43.3 59.8 38.0 70.9 55.8

VALUE LINE
Target Price Range 2013 2014 2015
200 160 100 80 60 50 40 30 20

3 1 3

Raised 4/23/10 Raised 12/14/01 Lowered 11/12/10

High: Low:

76.9 61.0

69.3 49.5

BETA .85 (1.00 = Market)

LEGENDS 14.0 x Cash Flow p sh . . . . Relative Price Strength Options: Yes Shaded areas indicate recessions

Annl Total Price Gain Return High 120 (+75%) 17% Low 100 (+45%) 12% Insider Decisions
to Buy Options to Sell J 0 0 2 F 1 0 2 M 0 2 1 A 0 1 4 M 0 0 0 J 0 0 0 J 0 0 0 A 0 3 0 S 0 0 0

2013-15 PROJECTIONS

Institutional Decisions
4Q2009 1Q2010 2Q2010 330 416 378 to Buy to Sell 369 312 369 Hlds(000) 486976 491042 489817

% TOT. RETURN 10/10

Percent shares traded 36 24 12
THIS STOCK VL ARITH. INDEX

1 yr. 3 yr. 5 yr.

29.3 -1.7 5.4

27.8 7.7 42.8

United Parcel Service of America Inc. was 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 founded in 1907 and is now the worlds larg- 26.24 27.35 27.85 29.66 32.40 38.82 44.44 48.04 51.72 45.62 50.10 53.30 est package delivery company. The initial 3.50 3.41 3.46 3.86 4.23 5.03 5.56 5.91 5.42 4.09 5.45 6.00 public offering occurred on November 10, 2.38 2.10 2.14 2.47 2.85 3.47 3.86 4.11 3.50 2.31 3.55 4.00 1999, when 109,400,000 Class B shares .68 .76 .76 .92 1.12 1.32 1.52 1.64 1.77 1.80 1.88 1.96 were sold at $50.00 each. Morgan Stanley 1.89 2.12 1.48 1.72 1.88 1.99 2.88 2.73 2.65 1.61 1.70 1.80 Dean Witter was the lead underwriter. Just 8.58 9.15 11.09 13.16 14.51 15.39 14.47 11.78 6.81 7.69 8.90 10.40 prior to the IPO, UPS merged with United 1134.7 1120.5 1123.0 1129.0 1129.0 1097.0 1070.0 1034.4 995.44 992.85 988.0 985.0 Parcel Service, Inc. Each share of United 24.9 26.7 28.5 25.9 26.1 21.1 19.8 17.8 18.4 22.6 Bold figures are Value Line Parcel Service, Inc. was converted to two 1.62 1.37 1.56 1.48 1.38 1.12 1.07 .94 1.11 1.51 estimates shares of UPS class A common stock. 1.1% 1.4% 1.2% 1.4% 1.5% 1.8% 2.0% 2.2% 2.7% 3.5%
CAPITAL STRUCTURE as of 9/30/10 Total Debt $9642 mill. Due in 5 Yrs $3700 mill. LT Debt $8648 mill. LT Interest $315 mill. (Total int. coverage: 15.6x LT int. earned: 17.2x) (50% of Capl) Leases, Uncapitalized: Annual rentals $364 mill. Pension Assets-12/09 $15351 mill. Oblig. $17763 mill. Pfd Stock None Common Stock 990,695,542 shs. 260,027,339 class A shares (10 votes each) 728,907,161 class B shares (1 vote each) as of 10/28/10 MARKET CAP: $68 billion (Large Cap) CURRENT POSITION 2008 2009 9/30/10 ($MILL.) Cash Assets 1049 2100 3752 Receivables 5547 5369 5250 Other 2249 1806 1754 Current Assets 8845 9275 10756 Accts Payable 1855 1766 1840 Debt Due 2074 853 994 Other 3888 3620 3967 Current Liab. 7817 6239 6801

VALUE LINE PUB., INC.

13-15
62.45 7.85 5.50 2.20 1.95 19.30 985.0 20.0 1.35 2.0% 61500 18.0% 2200 5520 35.0% 9.0% 15600 8500 19035 21.0% 29.0% 17.5% 39%

Revenues per sh er sh Cash Flow per sh Earnings per sh A Divds Decld per sh B Capl Spending per sh Book Value per sh C Common Shs Outstg D Avg Annl P/E Ratio Relative P/E Ratio Avg Annl Divd Yield Revenues ($mill) Operating Margin Depreciation ($mill) Net Profit ($mill) Income Tax Rate Net Profit Margin Working Capl ($mill) Long-Term Debt ($mill) Shr. Equity ($mill) Return on Total Capl Return on Shr. Equity Retained to Com Eq All Divds to Net Prof

29771 19.9% 1173.0 2795.0 39.3% 9.4% 2623.0 2981.0 9735.0 22.8% 28.7% 20.6% 28%

30646 17.5% 1396.0 2425.0 38.4% 7.9% 2968.0 4648.0 10248 16.9% 23.7% 15.3% 35%

31272 17.5% 1464.0 2422.0 37.8% 7.7% 3183.0 3495.0 12455 15.7% 19.4% 12.6% 35%

33485 17.8% 1549.0 2807.0 34.9% 8.4% 4335.0 3149.0 14852 15.9% 18.9% 12.0% 37%

36582 17.9% 1543.0 3238.0 34.2% 8.9% 6122.0 3261.0 16384 16.8% 19.8% 12.4% 37%

42581 18.3% 1644.0 3870.0 36.3% 9.1% 4210.0 3159.0 16884 19.7% 22.9% 14.7% 36%

47547 17.6% 1748.0 4202.0 35.5% 8.8% 2658.0 3133.0 15482 23.1% 27.1% 17.0% 38%

49692 12.7% 1745.0 4369.0 1.1% 8.8% 1920.0 7506.0 12183 22.8% 35.9% 21.9% 39%

51486 15.8% 1814.0 3581.0 40.1% 7.0% 1028.0 7797.0 6780.0 25.7% 52.8% 20.1% 62%

45297 12.2% 1747.0 2316.0 31.2% 5.1% 3036.0 8668.0 7630.0 15.6% 30.4% 7.4% 76%

49500 15.5% 1825 3560 35.0% 7.2% 4590 8645 8780 21.5% 40.5% 19.5% 52%

52500 16.0% 1900 4010 35.0% 7.6% 6170 8600 10260 22.0% 39.0% 20.5% 48%

BUSINESS: United Parcel Service, Inc. is the worlds largest integrated air and ground package delivery carrier. Also provides specialized transportation and logistics services. Service is offered throughout the U.S. and in over 200 other countries and territories. Domestic package operations accounted for 62% of 09 revenues; international (21%); supply chain & freight (17%). Fleet owned and

leased (at 12/31/09): 565 planes and 101,900 ground vehicles. 2009 depreciation rate: 5.0%. Has about 408,000 employees (over 61% unionized). Officers and directors own about 1.0% of common stock; BlackRock Inc., 4.2% (3/10 Proxy). Chrmn./CEO: D. Scott Davis. Incorporated: DE. Address: 55 Glenlake Pkwy., NE, Atlanta GA 30328. Telephone: 404-828-6000. Internet: www.ups.com.

United Parcel Service posted solid third-quarter results. Overall volume ANNUAL RATES Past Past Estd 07-09 growth boosted revenues as the general of change (per sh) 10 Yrs. 5 Yrs. to 13-15 economic recovery persisted (albeit at a Revenues 8.5% 10.0% 4.0% sluggish pace). Meanwhile, share earnings Cash Flow 8.0% 6.0% 7.5% Earnings 8.5% 6.0% 9.0% advanced nearly 70%, driven by improving Dividends 14.5% 13.0% 4.0% operating margins as the company continBook Value 5.0% -7.5% 14.0% ued its focus on productivity improveQUARTERLY REVENUES ($ mill.) CalFull ments. Margins were also helped by the endar Mar.31 Jun. 30 Sep. 30 Dec. 31 Year companys decision to retain a greater por2007 11906 12189 12205 13392 49692 tion of revenue from general rate and fuel 2008 12675 13001 13113 12697 51486 surcharge increases. Furthermore, a more 2009 10938 10829 11153 12377 45297 favorable price-and-product mix in favor of 2010 11728 12204 12192 13376 49500 higher-margin packaging, greater weight 2011 12500 13200 13300 13500 52500 per piece, and expanded international EARNINGS PER SHARE A CalFull shipping helped to bolster the bottom line. endar Mar.31 Jun. 30 Sep. 30 Dec. 31 Year Moving forward, we expect ongoing im2007 .96 1.02 1.03 1.10 4.11 provement in general economic conditions 2008 .87 .85 .96 .82 3.50 and the holiday shopping season to contin2009 .52 .49 .55 .75 2.31 ue to drive top- and bottom-line gains in 2010 .71 .84 .93 1.07 3.55 favor of higher-margin and international 2011 .85 .95 1.00 1.20 4.00 shipping alternatives; all told, we predict a QUARTERLY DIVIDENDS PAID B CalFull strong 54% share-earnings gain, year over endar Mar.31 Jun.30 Sep.30 Dec.31 Year year, in 2010. 2006 .71 .38 .38 -1.47 Expanded international offerings will 2007 .80 .42 .42 -1.64 likely drive growth. Foreign business, 2008 .87 .45 .45 .45 2.22 especially from Asia and other rapidly ex2009 .45 .45 .45 .45 1.80 panding emerging markets, has and will 2010 .47 .47 .47 .47
(A) Diluted earnings. Excludes nonrecurring 1999 is pro forma. Next earnings report due gain (loss): 00, $0.11; 02, $0.73; 03, $0.08; mid-February. 04, $0.08; 07, ($3.77); 08, ($0.56); 09, ($0.17); 10, ($0.12). All data prior to November (B) Dividends historically paid early March,

likely continue to outpace domestic gains as globalization and expanded international shipping options make such transactions more fluid and accessible. The company will likely continue to utilize its healthy cash position. Thus far this year, it has bought back roughly $600 million of stock, spent more than $1 billion on pension contributions, and reduced long-term debt by $20 million. Management has indicated it intends to continue to deploy capital on share repurchases and pension contributions through the rest of 2010 and in 2011. It also announced a reimplementation of its 401k match as an employee benefit. Moreover, a dividend increase is likely in the coming year. Although these outlays may cause somewhat of an earnings headwind, they are supported by a healthy financial structure, as per our Highest Safety ranking. These shares are not particularly appealing at this time. Despite their high investment quality and solid dividend, they are likely to match the general market over the coming year and have average 3- to 5-year appreciation potential. Simon E. Shnayder December 3, 2010
Companys Financial Strength Stocks Price Stability Price Growth Persistence Earnings Predictability A 95 35 80

June, September, and December. (C) Includes intangibles. At 9/30/10: $2694 mill., $2.72 per share. (D) In millions.

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