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Investment Thesis
Deutsche Post AG (OTCPK:DPSTF) reported its Q3 2022 results on the 8th of November. On October 10th, the company already had reported a preliminary EBIT of €2.04 billion, implying 15% YoY growth. This meant the results presented earlier this week were not really a surprise. We already knew Deutsche Post outperformed their outlook and probably expectations as well.
I think Deutsche Post is a very under-covered stock. I posted an article about Deutsche Post a little over a month ago, and since then there have been no other posts about it. My previous article about Deutsche Post resulted in a buy rating, and you can read that one here for a more in-depth view of the business.
Since my previous article, Deutsche Post has increased by over 16% in share price. For a very defensive company, this is a big step up in just a month. In that article, I wrote that I was still a little careful about Deutsche Post, as I was not sure whether they would be hit in the same way as FedEx (FDX) was right before my writing. There was a bit of uncertainty about whether Deutsche Post would be hit by the effects of the worsening macro environment. It turns out they were not. Or well, they were, but they dealt with it in a far better way.
Now, I can tell you that the 3Q22 results confirmed my thesis and I remain very bullish on the company in the near and long term, but I am also aware of the current economic problems which highly correlate with the business of Deutsche Post. Of course, all the more remarkable that Deutsche Post managed to report this kind of good results.
For those still not familiar with Deutsche post, I recommend reading my previous article, but here is a little excerpt:
Deutsche Post AG is a German logistics company, also known as Deutsche Post DHL. The company works on multinational package delivery and supply chain management. The company is headquartered in Bonn, Germany. Deutsche Post is one of the three largest carriers worldwide, only behind UPS and FedEx. The Parcel division DHL is a wholly owned subsidiary active in over 220 countries and territories.
Now let’s have a look at the numbers.
Third quarter results
Deutsche Post managed to report another strong quarter of growth despite all headwinds. Revenue came in at €24 billion, which means the top line grew by a staggering 20% YoY. This alone shows the real class of Deutsche Post. Management is acting in all the right ways. EBIT grew by 15.2% and came in at €2 billion, with EPS of €1.02, increasing 15.9% YoY. Free cash flow (“FCF”) was also strong at €1.8 billion, growing a whopping 44.6% YoY.
DHL Express was yet again strong this quarter, with revenues up by 22% YoY and an EBIT increase of 4% YoY. Revenue for this segment came in at €7.2 billion. This segment is being hit by rising fuel prices and FX effects, but still managed to report a 14% EBIT margin, which was only down slightly YoY.
DHL Global Forwarding, Freight saw revenues increase 38% YoY and came in at €7.9 billion. EBIT increased 57% and was €584 million. This increase in revenue and EBIT was very strong considering that volumes for this segment dropped by 11% YoY. This segment was supported by elevated rates and process improvements, which will keep supporting this segment going forward.
DHL Supply Chain saw revenue increase by 15% YoY and EBIT increase by 55% YoY. Revenue came in at €4.2 billion. This segment saw strong top and bottom-line growth, supported by strong new business wins and a higher renewal rate as a result of continuous investments in scaling digitalization and standardization.
DHL eCommerce Solutions revenue increased by 8% YoY to come in at €1.5 billion. This segment did see a slight drop in EBIT of 4% YoY. This segment is seeing an expected normalization, as we have now passed the strong eCommerce periods of 1H21. EBIT was down because of increasing cost pressure as Deutsche Post keeps investing in growth.
Post & Parcel Germany saw revenue of €4 billion, which was flat YoY. EBIT decreased by 3% YoY. Mail volumes saw a 5% drop, while parcel increased by 2% YoY in volumes. The company will be increasing prices going into 2023 for parcel deliveries to reflect the higher energy prices.
The general conclusion from everything above is that volumes dropped during the quarter, but management was able to offset these drops in volume by pulling other levers such as price increases. I am very impressed by the way management is dealing with the current situation, and this comforts me when thinking of entering a recession next year. Deutsche post has managed to report a total of €3.7 billion in free cash flow so far this year and has used €800 million of this for the first tranche of share buybacks. The new tranche of share buybacks totals €500 million, which will be executed between now and March 2023. This is all part of the ongoing €2 billion share buyback.
Double-digit growth and a raise in the FY22 guidance is very incredible. Yes, they also updated their FY22 guidance upwards. Deutsche Post does expect volumes to drop further over the next couple of quarters. The near-term outlook is not positive, as the worsening economy will have significant results on consumer spending and therefore also product shipments, which will hit Deutsche Post.
Management is aware of these economic problems and is acting on them accordingly.
- Deutsche Post increased the general prices by 7.9% to offset volume loss and inflationary effects.
- The company is acting on cost management
- And they are adapting constantly to the volume expectations to work as lean as possible.
Now that we have established that numbers were great and that management is aware of threats to the company and is already acting on them, we can now examine what the future may hold.
Outlook
Deutsche Post upgraded its outlook. Where they previously expected EBIT to come in at €7.6 – €8 billion, they now believe it will be between €8 – €8.4 billion for the full year. Free cash flow expectations are also up, from €3.6 billion to €4.2 billion.
Deutsche Post stated that it did not lower their mid-term guidance as they expect no prolonged and deeper downturn dragging into 2024. Therefore, they expect to recover in 2024 from a possible downturn during 2023. It is remarkable to see management giving these statements. Where most people have seen the economy get worse over the last 3 months and many getting much more negative, Deutsche Post does not share this feeling and they maintain their mid-term outlook. I very much hope they are right. The company is not changing its Capex expectations either, but they do confirm that network flexibility and adaptations to volume fluctuations will play a crucial role in dealing with the next few quarters.
Deutsche Post wants to remain and possibly increase its incredibly strong moat. To give you an idea of their moat, these should illustrate it well:
- #1 Global TDI express
- #1 Air freight
- #2 Ocean freight
- #1 parcel Germany
Balance sheet and valuation
Deutsche Post continues to have a strong balance sheet, with a Net Debt/EBITDA of 1.3x. The company ended the quarter with €5.1 billion in total cash, giving the company a strong cash position to cover itself for the more difficult times ahead.
The strength of the balance sheet also allows Deutsche Post to keep returning cash to shareholders. The dividend currently yields 5.23% with a 5-year growth rate of 14.8%. I do not expect Deutsche Post to keep increasing at this rate over the next couple of years, but they will try to keep their yield above 5%. Deutsche post has been paying a dividend for 21 consecutive years now and undoubtedly will be adding many more. They have only increased for three straight years as they did not raise the dividend during the covid pandemic initially. The payout ratio is still only 42%, so this leaves Deutsche Post with some margin of safety and room to increase or maintain its dividend during a downturn.
As I mentioned before, Deutsche Post is also returning cash to shareholders through share buybacks.
Deutsche Post currently holds a market cap of $43.26 billion and is valued at a forward P/E of 10.54. Valuation remains low, despite incredible financial performance and the more than 16% increase since my last post. Deutsche Post is still very much undervalued, and with the business growing at double digits and management having everything very well under control, I believe Deutsche Post is a buy from a valuation perspective.
Risks
Risks continues to be the same as a month ago, as I explained in my previous article:
The main threats for the company are the ones that were already acknowledged by management during their last earnings call. The company is very sensitive to macroeconomic uncertainty and a drop in GDP. The courier sector is very much connected to the GDP number, so if this one drops, this will likely have a bad influence on the business of Deutsche Post. I think the company is positioning itself very well to be able to cope with a worsening environment and looking at the earnings call, we can see management is very aware of the current economic turmoil. But even though management is very well prepared, a drop in consumer spending will result in less production and less demand for delivery and transport services. This drop is inevitable and needs to be priced in if you believe a severe recession is incoming.
I do believe the only threat for this company is this economic slowdown. The moat of the company is too strong and the barriers to enter this industry are too high. Companies and consumers appreciate their delivery platform, which they have already been using for years.
This latest quarter did comfort me a bit more regarding the economic uncertainty affecting Deutsche Post, but this continues to be an issue.
Conclusion
Growth was impressive, the outlook remains strong, and management is dealing with the difficult economic situation very well. I continue to be a buyer of Deutsche Post, as I believe the company is still valued way too low and a lot of economic headwinds have been priced in already. The recent increase in the share price and the uncertainty regarding the economic outlook, however, kept me from upgrading Deutsche Post to a strong buy for now, so I keep Deutsche Post at Buy. I do want to add to this that the fundamentals of the business and the way Deutsche Post management is dealing with everything, in combination with valuation, means a strong buy could be in place. Yet, the economic uncertainty weighs too heavy for now.
I rate Deutsche Post a clear buy.
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