Deutsche Post struggles in United States

Deutsche Post AG may deliver packages in more than 200 countries and territories, but it doesn't look likely to deliver for investors soon. That is because the German delivery and logistics giant is stumbling in the market that matters most and where many of its investors reside: the U.S.

Even though the Bonn-based company had predicted that its DHL Express USA unit would turn profitable by the fourth quarter of this year, management now says the unit probably will keep posting losses through at least 2007. Deutsche Post, which is losing roughly half a billion dollars a year in the U.S., also said recently that it would stop providing investors with quarterly guidance for its U.S. operations.

"Uncertainty coupled with less visibility: That's what financial markets don't like at all," says Markus Hesse, an analyst in Frankfurt at the private bank Sal. Oppenheim. Mr. Hesse has a "neutral" recommendation on the stock. (Sal. Oppenheim has no investment-banking relationship with the company and doesn't own Deutsche Post shares but trades them regularly for clients.)

The U.S. represents a misstep for Deutsche Post, which has transformed over the past 15 years from a money-losing German letter-carrier monopoly into a globe-trotter _ which even makes stops in Iraq and North Korea _ that generates half of its 45 billion euros ($54.47 billion) in annual revenue abroad. Measured by revenue, it is bigger than both FedEx Corp. and United Parcel Service Inc. and has a market value of 25 billion euros.

Germany's federal and state governments still hold an indirect stake of 41.7 percent in the company through KfW Bankengruppe, a development bank. Since Deutsche Post's shares aren't listed in the U.S., American stock pickers must buy its shares on German stock exchanges or through a U.S. mutual fund. Just above 15 percent of its shares were held by American investors as of the end of December, according to Thomson Financial.

Among U.S. institutions that held substantial stakes in recent months are Franklin Templeton Investments, Capital Group, Fidelity Investments and TIAA-CREF, according to Thomson. The firms declined to comment.

Deutsche Post booked a 40 percent rise in net income to 2.24 billion euros last year. But doubts about its prospects in the U.S. contributed to a 7 percent fall in the company's share price in a single session last month. In Frankfurt Tuesday, Deutsche Post's stock fell 1.19 percent to 20.73 euros. Its 52-week high is 23.75 euros, reached Feb. 1.

"I haven't had anybody give me any really good arguments why in one or two years they're going to do well," says Robert Benthem de Grave, a portfolio manager who helps oversee more than $7 billion in international equities investments at Philadelphia International Advisors. The investment firm doesn't own Deutsche Post shares and plans to steer clear for now even though it has looked at them in the past, he adds.

Deutsche Post has struggled to build a reliable transportation network in the U.S. despite launching a $1.2 billion investment plan in 2004 after acquiring full control of DHL International Ltd. in 2002 and Airborne Inc. in 2003. Late deliveries have sparked customer defections and forced Deutsche Post to offer price discounts.

Management says its drive into the U.S. lost momentum in late 2005, when the company encountered difficulties in integrating operations at its new hub in Wilmington, Ohio. It maintains that it now has a strong network in place and that service is at all-time highs, which it believes will help it attract new clients and allow it to charge higher prices.

The company estimates that it has only a 7 percent market share in the U.S. domestic express business, which continues to be dominated by FedEx and UPS. The stakes are high: Deutsche Post rings up less than 10 percent of its revenue in the U.S. but more than 50 percent of its global express-delivery customers are based there. Failure in the U.S. could jeopardize its business in other corners of the world.

Still, Brian Barish, president of Denver-based Cambiar Investors LLC with $6.7 billion under management, contends that plenty of pessimism already has been priced into Deutsche Post's shares, which trade at about 11 times earnings. He figures the German company has been successful elsewhere and eventually will find a way to stop the bleeding in the U.S. _ even if that requires a management shake-up first. In comparison, FedEx trades at a considerably richer 21.22 times per-share earnings and UPS is at 23.42 times.

"You can't lose as an investor; you just have to be patient," says Mr. Barish, adding that his investment firm bought an initial stake in Deutsche Post late last year and has increased its holding since. Cambiar held 135,000 shares at the end of December, according to Thomson.

But other investors aren't prepared to stick around after Deutsche Post said earlier this year that it booked an impairment charge of 434 million euros to cover stubborn problems in the Americas region.

"We now assume that this unit remains heavily loss-making for the foreseeable future," investment bank HSBC PLC wrote in a recent research report. HSBC provides investment-banking services to Deutsche Post and trades its shares.

The bank, which cut its recommendation on Deutsche Post to "neutral" last month, also warned that a possible stake sale by KfW could put further downward pressure on the stock. The development bank sold an 11.4 percent stake last June and a lockup period that has prevented a follow-up sale ends in mid-May. A KfW spokeswoman says there aren't any plans to sell more shares but didn't rule it out, adding that further divestments depend on market conditions.

Heard on the Street: Deutsche Post struggles to deliver in the U.S.
European Intelligence WireWall Street US 04-12-2006
Germany's Deutsche Post AG has revised an earlier forecast that its DHL Express USA business will start generating profits by the fourth quarter, saying the unit is expected to incur losses until at least 2007. However, the 25bn logistics and package delivery firm said it has already improved its US network, a development that would lure new customers and justify plans to increase service fees. Analysts said a boost in DHL Express USA operations will be crucial to Deutsche Post. The country accounts for 10% of the company's global revenues and is the base for about 50% of Deutsche Post's global-express delivery clients.

Abstracted from: The Wall St Journal