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The following segment was excerpted from this fund letter.
CTT – Correios De Portugal (OTCPK:CTTPY)
“Finishing always triumphs over starting out. People usually fail when they are on the verge of success, so give as much care to the end as the beginning. Then there will be no failure.” Lao Tsu
CTT was by far the largest detractor from our performance in the second quarter (generating 9.7% of portfolio-weighted losses for us). You can imagine the surprise we had, as the company hosted its first capital markets day (CMD) in seven years. It appears someone was motivated to start short position in June, just before this CMD.
From the insider’s perspective, this looks incredibly short sighted. While the first quarter was not up to our standards, the team pulled it together, and reiterated profit guidance for the year. The guidance implies it will be the fastest growing of its peers this year, and we have worked hard with the management team to ensure this best-in-class growth sustains.
Looking further out, the company guided towards roughly doubling operating profit in the next few years, comfortably above where consensus forecasts laid at the time. What we think is the most important about the guidance, was that it was given in a period where we were experiencing recession-like conditions. Thus, as opposed to the capital markets days of the tech companies last year, this outlook is built-up through conservatism.
What’s more, is that the CMD was not a “sell the news” event. As the managers alluded to, there are important balance sheet restructuring initiatives well underway. Indeed, they have been worked on for years. Those with the most knowledge of the company, those that sit on the board, have decided to upsize the buyback program, as we personally believe current prices to be a gift. They attribute zero value to the operating business, which is in the process of becoming less capital intensive, all while committing to getting to net zero in carbon emissions by 2030.
We looked at consensus forecasts for all companies in the logistics industry with $1 billion or more of revenue, and CTT is poised to be the fastest growing company over the next few years based on the conservative medium-term outlook. This is underpinned by being a share attacker in the fourth largest, but fastest growing, e-commerce market in Europe. While e-commerce might be a word that causes investor anxiety right now, that environment provides us with wonderful opportunities to complete the “Shopify stack” that the team has been working on.
In summary, not only is the company better, faster, and greener than its peers, but it’s also the cheapest. It operates in one of the best performing economies in the developed world. And while investors view Europe to be a consensus short, the fundamental economic data is significantly stronger in Portugal and Spain than the rest of the world. The company’s 502-year old history is a testament to the durability of its franchise, and given the deep transformation that has occurred in the last few years under new leadership, it is also growing more quickly than it ever has.
One of the most notable things about owner operators, which we call builders, is the fact that they create most of their outstanding value during periods of stress. At our investor day in June, we recalled how four years after Sergio took the helm of Fiat, the company was posting record operating profits in the middle of the 2008 financial crisis. That placed the company in a very agile position to take advantage of the unfortunate position Chrysler found itself in due to a certain private equity firm.
Three years into the term of the new leadership at CTT, we are approaching record operating profitability. And furthermore, we are freeing up excess capital to enable a very opportunistic approach to whatever may come. We are reassured that 3/4 of the business is either non-cyclical, or positively correlated to inflation and interest rates.
While the market views the transportation sector as cyclical, we think the robots are wrong to characterize this company in the same bucket as container shipping, for instance, which we are short through Cosco Shipping Holdings (OTCPK:CICOF). Through the bank, through the savings products distribution, and through an inflation-protected mail price formula, which allows us to recapture nearly all of the decline in volumes, we think CTT is highly anti-fragile.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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