Applied Security Analysis

This report analyzes FedEx Corporation's competitive situation, assesses its cost of equity and weighted average cost of capital, and performs valuation using various methods, including free cash flow and discounted dividend valuation. It concludes with recommendations for investors based on the analysis.

Applied Security
Analysis

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
1. An analysis of the competitive situation of Fedex:..................................................................3
2. An assessment of the cost of equity or weighted average cost of capital for the company:....6
3. A valuation of the company based on one or more valuation methods used in the course:....6
4.Recommendations:....................................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Security analysis is the analysis of various financial instruments specially securities for
the purpose of trade. It helps in finding the values of various assets and finding their effects
through different valuation methods in the market fluctuations for the purpose of taking
investment decisions. Such analysis are important as they helps the investors to determine the
qualities of instruments and the risks associated with them. For the analysis of securities, FedEx
is selected (Williams and Dobelman, 2017). The selected company provides courier delivery
services founded in 1971 having its headquarters at Memphis, Tennessee. U.S. This report
includes the competitive analysis of the company situation, assessment of equity or weighted
average costs of capital, valuation of the company based on various methods of valuation and
some recommendations to buy, sell or hold the stocks.
TASK
1. An analysis of the competitive situation of Fedex:
FedEx corporation is an US company and engaged in providing courier and delivery
services across the various countries. Company operates its activities through its major segments
named as: FedEx Express, FedEx Freight, FedEx Ground and Kinkos segements. Under FedEx
Express company is majorly providing express and fast courier services by means of Air
services, FedEx Ground provides courier delivery services through Truck and other transport,
FedEx Freight provides freight services and Kinkos segment handles other activities like
printing, shopping, retail etc. Presently company holds approx 44.81% market share in industry.
Following are the market share segment-wise of company in Industry in year 2018:
FedEx Express Segment: In this segment company is maintaining their market share at
approx 27% to 29%, presently in year 2018, FedEx Express's market share is approx 28.20.

FedEx Freight Segment: Under this segment company is holding their market share
between 55% to 59% approx which is highest in this segment sector's industry. At the end of
year 2018, company's market share is about 55.76%.
FedEx Ground Segment: Through this segment company covers market share approx
35% to 40% that is significant to for company to attract customers (Norman, T. L., 2016). This
segments presently holds 37.75% of total market share.

Kinkos Segment Segment: It is small segment of company but major in term of
operating supporting activities by this segment company holds market share of approx 10% to
12% however company is enjoying high growth in this segment. In 2018 company has reported
market share of approx 11.35%.
FedEx is facing a competition in industry and company's top competitors are United
Parcel Service Inc and Expeditors International Of Washington Inc in courier delivery and
transportation services. These both competitors are giving tuff competition because of their
available economic resources, local support in terms of subsidy and grants from government.
Presently company's market cap is approx 47704 Millions whereas market cap of United Parcel
Service Inc and Expeditors International Of Washington Inc is approx 105834 millions and
13563 millions respectively (Annual Report of RedEx, 2018). However company is achieving

growth company through expansion and it is expected that company can beat its competitors in
coming year. Following table describes company's overall competitive situation of company as
compare to its competitors:
2. An assessment of the cost of equity or weighted average cost of capital for the company:
Calculation of Beta:
FedEx Share price
Date Open High Low Close Adj Close
2017-04-01 195.860001 199.169998 182.889999 189.699997 185.764328
2017-05-01 189.910004 195.940002 186 193.839996 189.81842 2.18%
2017-06-01 194.580002 218.360001 193.940002 217.330002 212.82106 12.12%
2017-07-01 218.490005 219.990005 206.220001 208.029999 204.198029 -4.05%
2017-08-01 208.960007 215.149994 203.130005 214.380005 210.431061 3.05%
2017-09-01 215.119995 226.339996 209.669998 225.580002 221.424744 5.22%
2017-10-01 225.509995 231.350006 217.770004 225.809998 222.170395 0.34%
2017-11-01 227 233.889999 214.169998 231.460007 227.729355 2.50%
2017-12-01 231.720001 255.110001 226.169998 249.539993 245.517944 7.81%
2018-01-01 250.830002 274.660004 250 262.480011 258.7901 5.41%
2018-02-01 258.149994 265.670013 226.199997 246.410004 242.945999 -6.12%
2018-03-01 246.350006 258 228.899994 240.110001 236.734573 -2.56%
2018-04-01 239.190002 257.470001 231.710007 247.199997 244.232727 3.17%
2018-05-01 247.229996 256.299988 236.610001 249.119995 246.129654 0.78%
2018-06-01 251.570007 266.670013 222.440002 227.059998 224.334488 -8.86%
2018-07-01 225.369995 248.619995 225.259995 245.869995 243.560364 8.57%
2018-08-01 245.699997 252.289993 238.779999 243.949997 241.658401 -0.78%

2018-09-01 243.899994 259.25 237.509995 240.789993 238.528091 -1.30%
2018-10-01 242.479996 243.550003 207.899994 220.339996 218.848007 -8.25%
2018-11-01 221 231.850006 218.350006 229 227.449371 3.93%
2018-12-01 232.660004 234.490005 150.940002 161.330002 160.237579 -29.55%
2019-01-01 158.520004 179.190002 156.960007 177.570007 176.902298 10.40%
2019-02-01 178.300003 187.039993 173.770004 181 180.319397 1.93%
2019-03-01 182.020004 185.309998 167.610001 173.990005 173.335754 -3.87%
2019-03-22 177.550003 178.130005 173.839996 173.990005 173.990005 0.38%
Index Price
Date Open High Low Close Adj Close
2017-04-01 2362.340088 2398.159912 2328.949951 2384.199951 2384.199951
2017-05-01 2388.5 2418.709961 2352.719971 2411.800049 2411.800049 1.16%
2017-06-01 2415.649902 2453.820068 2405.699951 2423.409912 2423.409912 0.48%
2017-07-01 2431.389893 2484.040039 2407.699951 2470.300049 2470.300049 1.93%
2017-08-01 2477.100098 2490.870117 2417.350098 2471.649902 2471.649902 0.05%
2017-09-01 2474.419922 2519.439941 2446.550049 2519.360107 2519.360107 1.93%
2017-10-01 2521.199951 2582.97998 2520.399902 2575.26001 2575.26001 2.22%
2017-11-01 2583.209961 2657.73999 2557.449951 2584.840088 2584.840088 0.37%
2017-12-01 2645.100098 2694.969971 2605.52002 2673.610107 2673.610107 3.43%
2018-01-01 2683.72998 2872.870117 2682.360107 2823.810059 2823.810059 5.62%
2018-02-01 2816.449951 2835.959961 2532.689941 2713.830078 2713.830078 -3.89%
2018-03-01 2715.219971 2801.899902 2585.889893 2640.870117 2640.870117 -2.69%
2018-04-01 2633.449951 2717.48999 2553.800049 2648.050049 2648.050049 0.27%
2018-05-01 2642.959961 2742.23999 2594.620117 2705.27002 2705.27002 2.16%
2018-06-01 2718.699951 2791.469971 2691.98999 2718.370117 2718.370117 0.48%
2018-07-01 2704.949951 2848.030029 2698.949951 2816.290039 2816.290039 3.60%
2018-08-01 2821.169922 2916.5 2796.340088 2901.52002 2901.52002 3.03%
2018-09-01 2896.959961 2940.909912 2864.120117 2913.97998 2913.97998 0.43%
2018-10-01 2926.290039 2939.860107 2603.540039 2711.73999 2711.73999 -6.94%
2018-11-01 2717.580078 2815.149902 2631.090088 2760.169922 2760.169922 1.79%

2018-12-01 2790.5 2800.179932 2346.580078 2506.850098 2506.850098 -9.18%
2019-01-01 2476.959961 2708.949951 2443.959961 2704.100098 2704.100098 7.87%
2019-02-01 2702.320068 2813.48999 2681.830078 2784.48999 2784.48999 2.97%
2019-03-01 2798.219971 2860.310059 2722.27002 2800.709961 2800.709961 0.58%
2019-03-22 2844.52002 2846.159912 2800.469971 2800.709961 2800.709961 0.00%
Covariance 0.0022731771
Variance 0.0012533303
Beta (Covariance/Variance) 1.8137095933
Cost of Equity Amount of Equity
Riskfree rate 4.40% Shares 4.2828
Beta 1.81 Price $237.45
Market return 12% Value $1,017
Cost of Equity 18.16%
Cost of Debt Amount of Debt
Average Rate 3.66% Book value $16,585
Tax Rate 35% Adjustment 1
Cost of Debt 2.39% Value 16585
Total Capital $17,601.95
WACC = (E/V * Ke) + (D/V) * Kd * (1 – Tax rate)
= 14.81%*($1017/$17601.95) + 2.39%*(16585/17601.95) 3.30%
Here,
E = Market Value of Equity.
V = Total market value of equity & debt.
Ke = Cost of Equity.

D = Market Value of Debt.
Kd = Cost of Debt.
Tax Rate = Corporate Tax Rate.
Calculation of PE Ratio:
PE Ratio = Share Price/EPS
(2018) = 249.54/16.79 = 14.8624
Here, Share price is taken as on 30 Dec. 2018 and EPS as reported by company in annual report.
(Performance chart of FedEx 2018). A high P/E suggests that investors are expecting higher
earnings growth in the future compared to companies with a lower P/E. A low P/E can indicate
either that a company may currently be undervalued or that the company is doing exceptionally
well relative to its past trends. When a company has no earnings or is posting losses, in both
cases P/E will be expressed as “N/A.” Though it is possible to calculate a negative P/E, this is
not the common convention.
3. A valuation of the company based on one or more valuation methods used in the course:
Valuation as per Free Cash Flow Method:
2018 2017
Net Income 4572 2997
Non Cash Charges
Depreciation 3095 2995
Change in Working Capital -996 729
Cash Flow from operations 8663 5263
Add: Interest Expenses (1-Tax Rate) 364.932 334.848
Less: Capital Expenditure 5663 5116
Value as per Free Cash Flow method 3364.932 481.848
Valuation using Multi Stage Discounted Dividend Valuation method:

Current Earnings per share = 16.79 (in currency)
Current Dividends per share
= 2 (in currency)
Period = 5 (in years)
Beta of the stock = 1.37
Risk free rate= 4.40% (in percent)
Risk Premium= 10.60% (in percent)
EPS five years ago = 7.48 (in currency)
Estimated growth: 15.00% (in percent)
Net Income Currently = 4572 (in currency)
Book Value of Equity = 3149
3,037.00 (in last year
2017) (in currency)
Tax Rate on Income= 34.60% (in percent)
ROE (Net Income /Shareholder's
Equity)*100= 150.54% (in percent)
Retention = 88.09% (in percent)
Cost of Equity = 18.92%
Current Earnings per share= 16.79
Growth Rate in Earnings per share
Growth Rate Weight
Historical Growth = 17.55% 12.00%
Outside Estimates = 15.00% 17.00%
Fundamental Growth = 132.61% 71.00%
Weighted Average 98.81%

Payout Ratio for high growth phase= 11.91%
The dividends for the high growth phase are shown below:
1 2 3 4 5
Dividends 3.98 7.91 15.72 31.25 62.12
Growth Rate in Stable Phase = 15.00%
Payout Ratio in Stable Phase = 90.04%
Cost of Equity in Stable Phase = 18.92%
Price at the end of growth phase = 13767.26
Present Value of dividends in high growth phase = 60.02
Present Value of Terminal Price = 5788.11
Value of the stock = 5848.12
Valuation using H Model method:

4.Recommendations:
From above analysis of securities of FedEx it is clear that company is able to generate
profits and payment of dividend. However company should expand their market share to gain
competitive advantages. As per valuation of company it is analysed that company is enjoying
sustainable growth in industry also in favourable condition for investors to make investment. So
it is recommended to buy and hold company's securities. In future company is going to achieve
overall remarkable growth due to its expansion strategy. Therefore it is recommended to
stakeholders to buy the securities of company to get better return in near future. By seeing
company's performance it is also recommendable to existing shareholders to hold securities.
CONCLUSION
From the above report it has been concluded that security analysis plays an important role
as it provides a framework for finding the values of various assets. Security analysis are required
to take the investment decisions by the FedEx after analysing various financial instruments. Such
analysis provides mechanisms to analyse the competitive situations of the selected company. It
also provided an assessment of the cost of equity or weighted cost of capital for the FedEx. Such
company uses various valuation methods such as Free cash flow method, Discounted method and
Market valuation methods.