Tweedy Browne comments Deut
Deutsche Post (XTER:DPW, Financial) is a Germany-based logistics conglomerate with leading global positions in most of its businesses. The business is named after its German Post (courier) and Parcels segment, but its largest and most valuable businesses are those of the DHL brand: Express, Freight Forwarding and Supply Chain Management which are part of of a global oligopoly that includes US-based UPS and FedEx. These businesses, along with a recently created business, e-Commerce Solutions, account for around 80% of Deutsche Post’s operating profit and benefit from trends in e-commerce, outsourcing and global commerce. The mail business in Germany is experiencing a structural decline which we believe will be primarily offset by e-commerce related growth in the parcel business in this segment.
The company transformed after the 2008 financial crisis. Current CEO Frank Appel abandoned DHL’s attempt to compete with UPS and FedEx in the US domestic market and refocused it on international express trade. Since 2013, DHL Express has improved operating margins in its segment by nearly 900 basis points and increased volumes by 8% per year. The company also successfully managed the decline of its courier business and developed a good supply chain management business. However, Deutsche Post’s freight forwarding segment has struggled.
Overall, driven primarily by the DHL Express business, Deutsche Post’s operating margins have improved by over 400 basis points, and the company has now generated a consistent ROE of over 20%, including goodwill. Additionally, the current management has changed the culture and mindset of the company as it has focused more on capital returns and free cash flow generation. It also has a program to buy back 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 steady operating profit, and its freight forwarding business should be able to grow revenue at a GDP-oriented pace over time. However, the company’s other businesses have secular growth drivers (primarily e-commerce), and we believe these businesses should be able to grow revenue at mid-single-digit rates, or better, organically. longer term.
At or around the time of the initial purchase, Deutsche Post was trading at approximately 6.8x EBIT on its estimated 2021 and 2022 EBIT, less than 10x estimated 2022 earnings, and paying an annual dividend yield approximately 5.1%. Management expects EBIT to grow from ~€8 billion to €8.5 billion by 2024. If one were to use a more conservative estimate of €6.2 billion (EBIT) after normalizing the freight forwarder business and some other adjustments, this would imply an 8.9x EV/EBIT valuation. Private market transactions for comparable express and freight business transactions occurred at high multiples. Two directors, the current CEO and the president of the company all purchased shares at prices between $34 and $37 per share prior to the Fund’s initial share purchases at around $35.
Tweedy Browne (Businesses, Portfolio) letter for the second quarter of 2022.