Action: Initiate Position
This week will provide a potential opportunity to add Deutsche Post AG DHL Group (OTCPK:DPSGY) to the Lean Long-Term Growth Portfolio, (LLGP). This portfolio was created last month, with an introductory review provided to investors here.
Recent stock price performance from FedEx (NYSE:FDX) is an indication of the current strength of the package delivery market, particularly from e-commerce. DHL Group is at a similar valuation as FedEx was during the January lows, trading under 14 times estimated diluted EPS.
DHL Group has multiple potential catalysts to lead to stock price appreciation during 2016. The company experienced a variety of one-time charges during 2015, including the restructuring of the supply chain business segment. These one-time charges should not carry over into 2016 allowing for improved EBIT growth and diluted EPS.
During 2015, the company witnessed robust e-commerce driven parcel demand in Germany, Europe and outside of Europe. Over the long term, this segment will eclipse the Post segment as the primary growth driver. The company should witness substantial operating profit growth during 2016 and solid free cash flow growth due to a low 2015 comparable.
The express segment witnessed robust growth by volume and revenue for all segments within and outside of Europe. This segment, similar to the Post and e-commerce segments, will witness improved operating margins compared to 2015. Both the freight forwarding and supply chain segments will also benefit from improved operating profit due to a lack of one-time charges. These segments witnessed slightly negative and robust revenue growth, respectively. All of these operating segments are estimated to improve DHL Group's operating profit by nearly 50% during 2016. If the company is able to meet its 2020 target, this will increase the operating margin by another 9% per year.
DHL currently has greater revenues than both FedEx and UPS (NYSE:UPS), yet has an enterprise value of $32 billion. FedEx and UPS have enterprise values of over $50 billion and $100 billion, respectively. Once profitability improves, DHL Group's stock price will appreciate to a more normalized valuation.
The primary factors that can derail the EBIT growth as a catalyst for stock price appreciation are worsening economic conditions globally, further overcapacity challenges for the air forwarding and freight and supply chain segments, or a slower execution of achieving the company's targets. If 2015 is any indication, however, the company exceeded its targets set during 2014. This places a strong near-term opportunity for 2016.
Another factor for investors to consider is that DHL Group trades on the over-the-counter market as an American Depository Receipt (ADR). The market for the company has an average number of shares exchanged over the past few months of nearly 100,000. The only other option, which might be more appealing to high-net worth investors, is to open an account with access to German stock exchanges and converting dollars to euros to make the investment.
Also of note for investors is the fact that the dividend yield will fluctuate based on currency exchange rates. The current dividend yield is near 3.5%. The DHL Group board will decide in May 2016 on the 0.85 euros dividend proposal; this is highly likely to pass. But if the dollar strengthens against the euro, the dividend rate will decline for U.S. holders of ADRs. Inversely, if the dollar weakens against the euro, the dividend rate will increase. Additionally, investors should seek information from the company whether there is a foreign tax on the dividend. (I have reached out and will update this article accordingly.)
The bottom line is that today's opportunity provides investors with a potential 10% return per year over the next decade just based on the improving fundamentals of the company. This rate of return assumes a P/E ratio of 20 times earnings. For 2016, a return near 30% is not unreasonable based on a successful execution of the company's objectives. The company has authorized a $1 billion euro stock buyback program, which will help diluted EPS growth. Additionally, the company has suggested special dividends as an option.
Overall, these prospects provide for a unique opportunity to invest in a company with a strong business presence outside of the U.S. Additionally, the company is financially strong and improved EBIT based on targets has the potential to lead to substantial investor stock price appreciation.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DPSGY over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.