DEUTSCHE POST: THE BACK DOOR TO E-COMMERCE GROWTH?
15th November 2021
Share Price: €56.09
Dividend Yield: 2.4%
P/E Ratio: 14.6 times
Letter writing is a much less common activity nowadays, with the advent of email. However, this loss of revenue for the postal services, is more than offset by the surge in activity in parcel post, due to the continued growth of e-commerce.
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The chart for Deutsche Post shares is giving a very strong buy signal, so what is going on here? The e-commerce giants tend to use the courier services provided by the likes of DHL, Fed-Ex and UPS, rather than the postal services. However, DHL is owned by Deutsche Post - the full name of the company is Deutsche Post DHL Group.
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On reporting third quarter results in early November, Deutsche Post upgraded its earnings forecast for 2021, for the second time this year. The company expects to make operating profits (earnings before interest and tax) of €7.7 billion for 2021, and this is expected to exceed €8 in 2023. That represents a growth rate of over 2% per annum, which justifies the P/E ratio of 14.6.
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Historically, a P/E ratio of around 9 or 10 was deemed appropriate for the shares of a company that had stable and predictable earnings, but no growth. That would equate to a payback period of 10 years, if one had the financial resources necessary to buy all of the shares. In these times of extraordinarily low interest rates, one could increase that rating for stable/static earnings to around 12 times.
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Therefore, a P/E ratio for a company that is predicting modest growth of a little more than 2%, would be somewhere above 10, and 14.6 does not look to be too far out of line with that.
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However, Deutsche Post shares could command a much higher rating, in my opinion. Firstly, the management team has probably set a target growth rate that it knows it can comfortably exceed. Also, it is significant that DHL revenues from e-commerce activity continued to grow for the third quarter of 2021, compared to the third quarter of 2020, despite the fact that most of the high street stores reopened in 2021 and growth continued despite this additional competition for business.
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A more aggressive management team at Deutsche Post would hike up DHL's fees for the e-commerce giants. They should be demanding a far bigger slice of the pie being generated by consumers moving to e-commerce. This has enriched the likes of Amazon - so much so that Jeff Bezos is talking about flying to Mars!
In addition, a former state monopoly like Deutsche Post is probably over staffed and inefficient in many other ways.
It could therefore be a good target for an activist fund, who would demand much more from the management team than a paltry growth rate of 2%, in the midst of an e-commerce boom. That would be the catalyst that provides significant upward potential for the shares.
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Put in a more aggressive CEO, hike up parcel prices, slash workforce numbers...and bring old Bezos back down to earth by forcing him to pay a bit more for delivering all of those parcels!
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And don't talk to Fed-Ex or UPS before you hike up prices at DHL. That would look like price fixing, which is illegal. Just say that prices will have to go up for various reasons in the short term, and if Fed-Ex and UPS don't follow, you quietly back down. As these three operators control most of the market for international courier services, there is not very much real competition here, so there is considerable scope for an increase in fees.