Tweedy, Browne Fund - Deutsche Post: Generating A Consistent 20%+ ROE
Summary
- Since 2013, DHL Express has improved its segment operating margins by nearly 900 basis points, and grown its volumes by 8% annually.
- Deutsche Post’s freight forwarding segment has struggled.
- Due to the DHL Express business, DPSTF operating margins have improved by over 400 basis points, and the company has now generated a consistent 20%+ ROE.
photoschmidt
The following segment was excerpted from this fund letter.
Deutsche Post (DPSTF, DPSGY)
Deutsche Post is a logistics conglomerate based in Germany with leading, global positions in most of its businesses. The company is named after its German Post (mail) and Parcel segment, but its largest and most valuable businesses are the DHL branded ones: Express, Freight Forwarding and Supply Chain Management which are part of a global oligopoly which includes US based UPS and FedEx.
Those businesses and a recently created one, e-Commerce Solutions, comprise ~80% of Deutsche Post’s operating profit, and benefit from trends in e-commerce, outsourcing and global trade. The German mail business is in a structural decline which we believe should be mostly offset by ecommerce related growth in that segment’s parcel business.
The company transformed itself after the 2008 financial crisis. The current CEO, Frank Appel, abandoned DHL’s attempt to compete with UPS and FedEx in the US domestic market, and re-focused it on the international express business. Since 2013, DHL Express has improved its segment operating margins by nearly 900 basis points, and grown its volumes by 8% annually. The company also has successfully managed the decline in its mail business and has developed a good supply chain management business. However, Deutsche Post’s freight forwarding segment has struggled.
All in all, primarily due to the DHL Express business, Deutsche Post’s operating margins have improved by over 400 basis points, and the company has now generated a consistent 20%+ ROE including goodwill. In addition, the current management has changed the culture and mindset at the company, as it has been focusing more on returns on capital and free cash flow generation. It also has a program to repurchase 2 billion euros of its shares by the end of 2024.
According to the company, its post and parcel business aims to have stable or flat operating profit, and its freight forwarding business should be able to grow its revenue at a GDP-oriented rate over time. However, the company’s other businesses have secular growth drivers (largely e-commerce), and we believe those businesses should be able to grow their revenues at mid-single digit rates, or better, organically over the longer longer-term.
At or around initial purchase, Deutsche Post was trading at roughly 6.8x EBIT on its 2021 and 2022 estimated EBIT, less than 10 times 2022 estimated earnings, and paid an annual dividend yield of around 5.1%. Management expects EBIT to increase from ~8 billion euros to 8.5 billion euros by 2024. If one were to use a more conservative estimate of 6.2 billion euros (EBIT) after normalizing the freight forwarding business and making some other adjustments, it would imply a 8.9x EV/EBIT valuation.
Private market transactions for comparable express and freight forwarding businesses transactions have occurred at high multiples. Two directors, the current CEO, and the company’s Chairman all bought shares at prices between $34-$37 per share before the Funds’ initial purchases of stock at around $35.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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