Insights

“Naturally the disservice done students and gullible investment professionals who have swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.” – Warren Buffett

In a world where passive investment products like ETFs and index funds increasingly account for a larger portion of the total investment dollars and average investment holding periods shortening to a few months, the primary function of financial markets of price discovery is increasingly broken. Instead, as herd-like behavior dominates price actions, investment pricing is experiencing much more pronounced deviations from underlying valuations, both on the upside and the downside.

In 2022, this dynamic was at full display with European equities in general and with German equities specifically. As market participants turned sour on German markets, they were highly indiscriminate in their selling with no concern for the quality of the business or business valuation. One business we found to have been attractively priced due to such a dash for the exits was Deutsche Post (DPW). The stock declined in sympathy with the decline in German equities and the selloff experience by FedEx’s stock which was driven by issues that we believe to be specific to that company.

DPW is a global logistics business with a business mix diversified across domestic German operations and international logistics. Further, its business mix is diversified across Express, Freight Forwarding, 3PL Supply Chain, and domestic Post & Parcel businesses. DPW has a leading market position in each of these business areas.

DPW’s business value growth is masked by the mix of its business which combines a structurally declining legacy post business with dominant and growing global Express, freight forwarding, and supply chain businesses. However, with time, the overall business mix has shifted in favor of its higher-growth businesses. The German letter business’s impact on the overall revenues has become progressively smaller, accounting for just about 10% of total revenues. On the other hand, the DHL Express business has become the most important business value driver accounting for about a third of revenues and more than half of the profits.

Source: Company data & MAEG

The shifting business is relevant on two counts. Firstly, it is resulting in the company’s sales and EBIT growth accelerating. While the total sales growth (ex 2008, 2009, and 2021) was 3.7%, the Express division has grown at a CAGR of 5.9%. And secondly, DHL Express is one of the highest-quality logistics businesses.

DPW’s dominance in the business is reflected in the chart below with a 50%+ market share in all regions outside of the Americas. Notably, it has successfully expanded its competitive advantage with market share gains in every region over the past five years. The revenue mix of the Express business is largely skewed towards TDI, with the company’s TDI volumes growing at a very healthy rate with a 12-ye CAGR of 8.3% and a 5-ye CAGR of 8.4%.

Source: DPW Investor Presentation, November 2022

Additionally, as alluded to earlier, DPW had a dominant market position in every business it operates in as summarized below.

• • • Largest postal operator in Europe with a dominant ~61% share in Germany.
    • Market leader in global Time-Definitive International (TDI) business in Express with 50%+ market share in all regions outside America.
    • Largest global freight forwarder with #1 position in air freight and #2 position in ocean freight.
    • Largest third-party logistics (3PL) service provider with more than twice the share of the second largest player.

We consider Deutsche Post to be a fantastic business and a core holding for our funds. We were only too grateful for the opportunity afforded by such a myopic focus of market participants and used it to acquire a position in the company.